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  • Renovation And Construction Loan Requirements

  • A Guide To Renovation And Construction Loan Requirements

    Renovation And Construction Loan 

    Description: A loan that is used for building a residential home on vacant land or for making structural renovations on existing property.

    Important Terms

    Progress Payments

    This refers to a loan where the payments are made in a progressive manner in stages as required. Usually a schedule of payments is set for every construction stage, e.g. the foundation, putting on the roof, fully enclosed, etc.

    Fixed Contract (or non-Escalation Clause)

    With this type of contract the builder takes supervision and ownership of the entire project. The entire job is costed by the builders and every item is specified down to its type and cost. He commits himself legally to the contract price. In addition, the builder sources all of the building materials, pays the suppliers, does the carpentry, employs all of the sub contractors like carpet layers, wall paperers, painters, electricians, plumbers, bricklayers and drain-layers. It is the responsibility of the builder to manager the sub contractors and pay them according to the fix price stated in the contractor (the builder has to pay for any costs that run over).

    Quantity Surveyor

    This person is an expert in costs the various sub contractors who complete the dwelling. Another options that a builder who is providing a fixed price contract has is construction with full supervision from a Quantity Surveyor. A Quantity Surveyor will need to supply all costings and sub contracts to the applicant. The Quantity Surveyor needs to completely control and manage the project through completion.

    Contracting Out or Labour Only (sub contracting)

    A labour only contract is when a prospective borrower wants to manage the project on their own. With this kind of contract it is critical that all aspects of the project are costed and covered properly. The prospective borrower hires all sub contractors and the builder on a labour only basis. He will source all the materials that the sub contractors use. Materials and services provided by tradesmen and supplies are paid for on a piece meal basis. This can save on costs at times, however unless they are careful there could be lack of coordination which can lead to them underestimating the project's costs and result in cost over-runs as well the LVR being blown out that has been approved by the bank.

    Building Consent

    Also called a permit. The local Council within the locality of where the home is being built issues the consents. Specifications and plans must be submitted to the Council for approval of the materials being used in the proposed dwelling and method of construction as well as ensuring that building codes are adhered to. The Council makes all other building regulatory requirements required by the government are being met (for one, the Resource Management Act). The project is visited by building inspectors at certain times to make sure that all of the various specifications and building codes are being followed (the property will be inspected before internal lining are started to make sure internal electrical wiring meets the standards). Before any alterations are undertaken to an existing dwelling or a new home is started, it is required that a building consent be obtained first.

    Code of compliance

    The local council issues the code of compliance once the dwelling is completed. The certificate shows that the project has been completed according to the building consent.

    All Risks Insurance For Builders

    This kind of insurance covers against civil claims (such as public liability) that is the result of any damage that is incurred. Material is covered from water damage, theft and fire. It may also cover against a digger damaging drainage, telephone cables or power supplies. A majority of Lenders require this policy to be held with them noted on the insurance as an interested party.

    House Insurance

    It is important for the client to have insurance in place throughout the construction process. For any renovation project, the house insurance needs to cover and note the renovation risk.

    Sub-divisions, Cross Leasing and Certificate of Title

    Usually a lender will require that a prospective borrower be completely registered on the Certificate of Title. When a developer is doing a cross lease subdivision and selling sections off that is never the case.

    At times a residential dwelling house owner might want to cross lease a portion of their section and have an additional dwelling built.