By Banking Association South Africa
Whether you are building a new home or improving your existing one, a building loan allows you to design and build your home just the way you want it.
A building loan is a home loan where a customer can finance both the vacant land and building project on one account. Unlike an ‘ordinary’ home loan, with a building loan the bank pays out the loan in stages, in the form of progress payments, as each stage of the construction/building work is completed. The bank cannot recommend any builder/s. However, legislation stipulates that all builders who build houses should be registered with the National Home Builders Registration Council (NHBRC). We expect legislation to be passed soon that will require builders who undertake structural alterations/improvements to a home to also be required to be registered with the NHBRC. While the primary contractual relationship (the building contract agreement) is between the customer and the builder (contractor), banks will grant you finance based to their qualifying criteria and enter into a building loan agreement with you.
When appointing a builder customers should make sure that they are using an NHBRC registered builder, as banks are not a party to the building contract between the customer and the builder. Should a dispute arise with the builder/developer, the dispute can be referred to the NHBRC for resolution.
Having identified that there is often misalignment between a bank’s building loan criteria and the building contract, The Banking Association South Africa (BASA) is discussing content for a building loan information pack that would be given to customers before they embark on their home building journey with banks. If the signing of a building contract is subject to the approval of the building loan and the various progress payments that a bank will make, this will create alignment with the building contract and create an environment where the relationship between the client, the builder and is clear.
The building loan process
Building loan processes may vary between banks. A draft building contract (tender), signed by the builder must be provided by the client to the bank on submission of the building loan application. It is up to you as the client to make sure that the work you want your building contractor to do has been fully and accurately set out in the draft contract. The following documents are required when applying for a building loan by a bank:
- NHBRC Builders Registration Certificate of the builder.
- Signed Waiver of Builder’s Lien (this is only required by the bank pre-registration of the mortgage bond).
- Schedule of Finishes.
- Breakdown of Costs (inclusive of VAT).
- Minimum Specifications (this is only required by the bank pre-registration of the mortgage bond).
- The building plan that has been submitted to the municipality for approval (working drawings) with measurements, or the municipality approved plan.
- An approved municipality building plan together with proof of payment of the NHBRC enrolment fee and the registration of the property with the NHBRC is required by the bank prior to the commencement of building.
- A fully completed and signed building contract (it is essential that the signed building contract fully aligns to the terms and conditions as outlined in the building loan contract that the client concludes with the bank).
Often customers may be unaware of the additional costs associated with building a home. The costs which are over and above an ‘ordinary’ home loan will include:
- Shortfall amount (if applicable) – this is the sum of money that the customer may have to pay upfront to finance the building.
- Professional fees – these fees would include the use of an architect, engineer/s, quantity surveyor, project manager etc., and may vary according to rates charged by each professional.
- NHBRC enrolment fee – this is a fee that is paid by the builder/developer to register the new home and is usually included as part of the building contract and may vary between R6 500 and R34 000.
- Purchase price deposit (if necessary) – this amount will vary according to the property value. It is a payment made to secure the land, an amount that is stated in the offer to purchase agreement.
- Builder or contractor – the builder/developer should provide you with the contract price/sum inclusive of VAT (this is the sum tendered by the builder/developer and accepted by the customer for the execution of the building work) which will include things like labour, building material etc.
- Sundry costs – where no agreement has been made for sundry charges to be included in the building contract, sundry charges for any additional items will typically be for the account of the client and may include additional charges for soil testing and test pits, special foundations or reinforcing due to adverse subsoil conditions, the location of boundary pegs, bond registration costs, transfer duty and costs, interim rates and taxes, inspection fees and valuation fees.
It is essential that the client regularly meets with the builder and views progress on the building of their home. Before a builder submits a request for a progress payment, the builder will require that the client to sign the progress payment request form which states that the client is advising the bank that he/she is satisfied with the construction up to the stage of the progress payment. Under no circumstances should clients sign these progress payment request forms in blank or before they have ensured that the construction has been completed to their satisfaction.
Once your home has been built, banks normally retain 5% of the construction cost for ‘snags’ which you as the home-owner requires the builder to fix. Again, never sign this document in blank, or until you have satisfied yourself that the ‘snag’ list you compiled and agreed with the builder has been completed, as the bank will upon submission of a signed ‘snag’ list form (this is sometimes called a ‘happy’ letter pay these monies to the builder.
If you do not have the necessary expertise to oversee the construction of your home or time constraints prevent you from regularly inspecting your property, we strongly recommend that you appoint professionals to do so for you.
Whilst building your own home is complex and time consuming the joy that you will have once you have built your home to your requirements is considerable.
Happy home building!!
Image credit: illustration supplied by BASA