Building Loans can Serve Dual Purposes

Private Property South Africa
Anna-Marie Smith

Obtaining bank finance to facilitate a newly built, renovated or extended residential property, also contributes to the security of its long term asset value. This comes as the result of stringent measures in place to protect both consumers and institutions. The no tolerance approach of banks to unconventional, and informal building methods leaves little opportunity for irreparable ramifications, such as when cash strapped prospective owners and builders decide to take shortcuts.

And so, for those without the good fortune of being flush with large amounts of disposable cash, building loans enable the dual function of financing construction, while at the same time complying with the bank’s requirements of building guarantees, as specified by the National Homebuilders Registration Council (NHBRC).

Obtaining a building loan requires much the same as an ordinary home loan of a deposit, plus additional costs including monthly repayments, rates and taxes, insurance and utility deposits. Other costs incurred will include building plans and approvals, and rates and taxes upon ownership registration of the land, as well as costs incurred to submit builders’ NHBRC certificates.

Once approved, a building loan advances progress payments in phases during the construction period, while retaining sufficient funds to complete projects, followed by inspections for approval, after which the building loan reverts to a normal home loan.

Construction specialist David Eastment, owner of C3 Manhattan, who completes top end building and renovations in the Western Cape, says that many exclusive private estates uphold high standards by only employing NHBRC registered builders, this despite well heeled property owners not requiring bank finance. The NHBRC’s function is to, as an independent, non-profit, non-government organisation, to protect home buyers in the event of defective materials and/or construction methods, of newly built or still to be built residential properties. Eastment says it serves as an industry watchdog to facilitate ethical building practice, and to ensure that structural defects are insured for a five year period.

The bank’s qualifying criteria for a building loan also includes its satisfaction that a new residence will be built in an officially declared residential area. Approved building plans are required to provide proof to the banks that national building regulations are conformed to, and should building plans not yet be available, banks may only grant a partial loan of the property’s assessed value.

Banks require original NHBRC enrolment and levy payment certificates of building contractors to prove that a builder has not been de-registered, that properties are enrolled with the NHBRC, and will finance levy payments from bonds when necessary.

Loan applicants have to supply banks with documentation to complete different stages of the building process, such as provisional plans or working drawings, as well as schedules with planning and finishing dates. The all risk building insurance required by banks protects against any loss or damage that may be incurred during the contract period, such as fire, lightning, explosion, earthquake and storm damage, as well as theft of building materials.

Industry specialists advise owners to obtain legal advice on building contracts before signing anything, to only pay deposits when written confirmation that funds will be held in a trust fund, are provided, and not to commence building prior to the registration of bonds.

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