Building Loans Explained
Build your dream home with a Building Loan
A building loan allows you to design and build your home just the way you want it. It lets you finance both the vacant land and your building project with one mortgage loan.
How the Building Loan works
When you apply for a building loan, the purchasing of the vacant land is generally included in the total loan. If the loan amount is greater than the contract price, payment is only made on registration of the vacant land, with the rest of the funds being retained to complete the building.
As the building progresses, payments are made to the developer/builder/nominated payee by means of progress payments. All progress payments must be authorised (signed) by you, the owner, so you must familiarise yourself with the state and progress of the building work on site before authorising such payments. The final payment is only made once the work is completed in full and an Occupation Certificate is issued by the local municipality.
A valuer appointed by the bank will visit the site prior to payout of each progress payment to inspect building work progress against the contract that the bank accepted on application to approve the loan.
From your first progress payment, interest is calculated on the daily outstanding balance and is capitalised to the account monthly. This is called interim interest and it's added to the loan amount - this interest is not paid during the building period. If you don't make interim payments, this interest will be added to the total building loan granted to you. The interest charged will then accumulate and might reduce the total loan amount paid out to you.
Building Loan process
- Approval of Building Loan
- Registration of Building Loan
- Progress payments are made at various stages of construction
- Building work starts
- Interim interest payable
- Final progress payment
- Building completed
Your questions answered
What's the relationship between you, the builder, and the bank?
You and the builder
The primary contractual relationship is between you and the builder/developer. The building contract stipulates the agreement on the building to be erected according to the plan, including the specifications, price etc.
You and the bank
The bank grants finance to you according to qualifying criteria and enter into a finance agreement with you. They manage the payments to the nominated payee of your choice, e.g. the builder/developer, as building progresses, according to your request and authorisation
The builder and the bank
There's no contractual obligation between the builder/developer and the bank.
What are your rights and obligations in terms of the building contract?
Before you sign the contract with the builder/ developer, make sure that the work you want your building contractor to do has been fully and accurately set out in the contract (including the plans and specifications).
Your obligation in terms of the contract is to pay the builder/developer for work completed satisfactorily, and the builder has to provide his/her services to a satisfactory level as stipulated in the building contract and conform to the National Building Regulations and Building Standards Act, 103 of 1977.
Don't rely on verbal promises or agreements. If you want to change the work to be done at a later stage, you'll have to reach agreement with your building contractor, and your contractor will usually be entitled to add a separate, additional charge as a variation to your contract. In terms of the Building Regulations Act, there are certain warranties on the part of your building contractor, and these apply regardless of what your contract says. Obtain a legal opinion to get clarity on what these are.
What are the contract requirements?
A building contract, signed by the contractor and accepted by you, must be provided on submission of the Home Loan application. The valuer appointed by the bank won't be able to complete the valuation if he/she doesn't have the fully completed and signed building contract.
The building contract must contain a detailed breakdown of all costs and work to be done for the building of a fully completed dwelling or unit, including all internal finishes.
Who's responsible for appointing a builder and signing the contracts?
When buying in a new development, the developer and the builder might be two different parties. The party with whom you sign the building contract (be it the developer him/herself or a subcontracted builder) is the party that you're liable to.
Why doesn't the bank protect you from the builder?
The primary contract is between you and the builder/developer - The bank is not a party to this contract. The only contractual obligation that they have is with you in terms of the Mortgage Loan Agreement. Always be aware of the content of the building contract that you sign and what you're agreeing to. Be aware of payment clauses, time clauses and the specifications you signed for.
What do you do if you're not satisfied with the quality of work done?
As a party to a binding contract, you have a right to engage with the builder/developer directly.
You should always engage directly with the builder/ developer first, as he/she needs to respond to your concerns and be given the opportunity to address them and ultimately rectify the problems. It is in your interest to note all complaints regarding quality in writing to the builder/developer - this ensures proof of your dissatisfaction with the quality of the work provided.
If no resolution is reached, you can, as a last resort, instruct the bank to make no further payment on the building until your concerns have been addressed to your satisfaction. You can also consult with an engineer to obtain a professional opinion.
Can The bank intervene in builder- customer disputes?
The bank is not a party to the building contract signed between you and the builder, therefore disputes must be resolved between the parties to the contract. The National Home Builders Registration Council (NHBRC) gives you protection in case of disputes and these can be referred to the Council. The only step the bank can take is not to make payments if you instruct them not to. Be aware of clauses in building contracts that govern legal arbitration and disputes.
Can The bank recommend builders and where to go for advice?
No, legislation stipulates that all builders who build houses that are subject to a mortgage loan should be registered with the NHBRC.
It is therefore recommended that you contact the NHBRC for references. Most reputable builders are registered with the Master Builders Association.
What if you have a dispute with your builder/developer?
First, talk to your building contractor. Many potentially serious disputes can be avoided through good communication between you and the contractor.
Your contract can have clauses relevant to dispute resolution that can assist both parties in resolving the dispute. If that doesn't work, you may need independent advice.
You might want to seek legal advice from a lawyer or the governing body (NHBRC or the Master Builders Association) where the builder is registered.
Some disputes can be resolved through negotiation. Others can only be resolved by legal proceedings, whether before the courts or by private arbitration as provided for in building contracts.
Is there a limit to the completion period?
All building loans will be subject to a maximum period of 9 (nine) months to complete all building operations, calculated from the date of registration of the mortgage bond. Banks do not accept any open- ended building contracts, i.e. all building contracts must have a start and completion date.
Where the completion period exceeds 9 (nine) months, the building loan application must be reassessed by the bank based on the value of the property as it stands after nine months of building.
What's your contribution/deposit?
Where a building loan is approved and the purchase of the land forms part of the loan application, your contribution/deposit in terms of the loan-to-value (LTV) policy must be provided upfront with the
land component of the transaction, or if the loan is less than the contract price, you'll have to pay the difference to the builder before the bank will commence with payments.
When you apply for a building loan, the bank will advise you of the shortfall amount, as well as the amount you require to complete the initial building to the end of the agreed first progress stage, as per your building contract.
Applying for a building loan
What documents must you submit?
Document
- NHBRC Builders Registration Certificate
- Signed Waiver of Builder's Lien (The bank form 1295BX)
- Schedule of Tender and Finishes
- Minimum Specifications (The bank form 1284EX)
- Plans that are submitted for approval (working drawings) with measurements, or
- Municipal-approved plan
- Fully completed and signed building contract
Where do you get these documents?
- The NHBRC documents can be obtained from the developer/builder.
- The Waiver of Builder's Lien, Schedule of Tender and Finishes and Minimum Specifications can be obtained from any The bank branch for completion by the builder/yourself.
- The provisional municipal-approved plan with measurements (also referred to as the sketch plan) and/or working drawings can be obtained from an architect or the developer/builder.
What's the NHBRC?
The National Home Builders Regulatory Council (NHBRC) was established mainly to protect the interests of housing consumers, and to regulate the home-building industry.
The purpose of the NHBRC is to protect you from builders who either build to an unacceptable quality standard, or who refuse to get involved in the rectification of defects in the home.
How are you protected by the NHBRC?
The NHBRC protects you by ensuring that all home builders register with the NHBRC and that all homes are enrolled prior to the commencement of building.
The NHBRC is mandated to provide protection for all new housing consumers against defined building defects.
By ensuring the builder is registered and the property is enrolled with the NHBRC, you'll have the assurance that a registered home builder has agreed to abide by the rules and regulations laid down by the NHBRC.
This means that such a home builder has agreed to build the enrolled house to a minimum quality standard that has been set out in the NHBRC's Home Building Manual.
When you do a building extension and/or renovation to your home, and you apply for a Further Advance Building Loan from the bank, it is advisable to ask the builder to confirm with the NHBRC that this property is enrolled with them. This will provide you with the same protection from the NHBRC as granted for a new home being built.
Approval of the building loan
What documents must be submitted after approval and prior to registration?
|
Document |
When required |
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Prior to registration or first payment |
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Various at different stages of building |
Where do you get these documents?
- The NHBRC documents can be obtained from the developer/builder.
- The Municipal-approved plan can be obtained from the builder/developer/yourself.
- Builder's All-Risk Insurance can be obtained from the builder/developer.
Further conditions of grant
No subdivisions of the property to erect multiple units will be permitted.
The subject property must be zoned as residential and used for residential purposes only.
Registration of the building loan
Building commencement and progress at various stages
What is a progress payment?
A progress payment is a request from you to get an amount paid for the work completed up to that specific stage of a construction project. You can, on request, indicate where the monies must be paid and to whom.
What is interim interest?
Interim interest starts to accrue on your loan from the day of the first payment made (normally on the land portion) on registration. Interim interest will be debited to the building loan account for the duration of the building operations, subject to the completion period of 9 (nine) months stipulated above.
How is interim interest calculated?
Interim interest is calculated on the outstanding balance of the account during the nine months allocated for building. It is calculated on the daily outstanding balance from the day that the first payment is made and gets accrued to the account at the end of every month.
As the building process continues, and the number of progress payments on the bond increases, the outstanding balance and the amount of interim interest on the account payable will increase. This interim interest will be added to the loan amount. It's recommended that you make interim payments to cover the interest.
What's the process to request a progress payment?
The builder will approach you with a Progress Payment form when he/she requires funds.
The form must be completed in full and signed by you. A copy of your specimen signature is kept on record for security purposes. It's very important to note that you must not complete or sign several of these forms in advance and no blank forms should be signed at all. This protects you against payments being made without your knowledge.
You then have the opportunity to verify that progress has been made on the construction and that payment to the builder/developer is warranted. The form to request a progress payment must be submitted either via the branch or directly to the valuation centre to enable the valuer appointed by the bank to inspect the property, determine the progress on the property and then approve the release of the funds.
At what stages must progress payments be requested?
Banks normally allow a maximum of 6 (six) progress payments on a project.
The final progress payment (the retained 10% of the building loan granted) will only be made when they receive the Occupation Certificate, issued by the municipality, from you.
What are the roles/duties of the valuer appointed by the bank?
The main duty of the valuer appointed by the bank is to conduct regular site inspections (on behalf of the bank) to ensure that there's work progress on site, to check that the building is constructed in accordance with minimum building requirements and the plans submitted, to visit the site when a request for a progress payment is submitted to them and to ensure that sufficient funds are held for completion of the building.
How is the amount payable calculated?
The original amount signed and agreed to as the contract amount is used as the basis of the payment. A valuer appointed by the bank will visit the construction site to assess if the building meets the minimum building requirements, is in accordance with the plans submitted and meets the progress payment stages agreed on with the bank. The valuer will also determine what funds are still required to complete the building. Taking all these factors into account, a calculation is made for the amount payable.
In this regard, banks don't take the building materials on- site into account when determining the amount to retain.
What do you do if more capital is required during the building process?
You'll need to submit a Further Advance Building Loan or Re-Advance application (if a sufficient bond is registered) for the additional funds. This will need to be supported by up-to-date financial information and any other supporting documents (e.g. amended plans) and must go through a credit assessment process.
If affordability isn't demonstrated, the additional loan won't be granted.
What do you need to do if you make changes to your contract/plan or contractor during the building process?
You'll need to advise the bank if your plan or contract changes at any time during the building process, as this can affect the valuation of the property or the loan that's been granted/registered.
The valuer appointed by the bank will need to be informed to reassess the property for security purposes, and this could impact the finance agreement that you've accepted.
What's the process you need to follow if you want to claim against a builder?
A complaint and claim needs to be lodged with the NHBRC and they'll apply appropriate processes to remedy the situation and handle the complaint directly with you.
Building Work Completed
On completion, when is your first repayment due?
The first repayment is due on the repayment day as chosen by you in the next month after the final payment is made, or 9 (nine) months after registration, whichever occurs first.
How is your repayment calculated?
If the property is completed before nine months, it is calculated on the full outstanding balance of the loan after the final payment has been made.
If the nine-month building isn't complete, it is calculated on the outstanding balance of the loan at nine months.
This is then increased once final payment is made. The final payment will only be made on receipt of the Occupational Certificate.
When do I insure my property?
It's compulsory to insure the property for comprehensive cover from the date that the property is fully completed, or from the time that occupation takes place.