Building Loans

Private Property South Africa
Denise Simpson

BUILDING LOANS - Useful tips to help you avoid potential the pitfalls

Cluster developments and gated communities are prolific throughout South Africa

and have become popular with both developer and client. Buyers apply for the

building loan and accrue all holding costs of the unit. The developer thereby

reduces his costs and only borrows money for the land and installation of

infrastructure. Sectional Title developments on the other hand remain the sole

risk of the developer. The client only takes transfer once the Sectional Title

Register has been opened.

Building loans, if not geared correctly, can cause severe stress to both the

bond holder and the developer. These tips may help you to avoid the pitfalls and

reduce the stress of the transaction. Before entering into an agreement to buy

land and build, you should check whether the builder is registered with National

Home Builders Registered Council (NHBRC) and if the builder is on the panel of

the bank of choice.

When applying for your building loan, the following documentation will be required by the bank to get a value on the end product:

  • A copy of the builder's NHBRC Registration Certificate.

  • Original enrolment certificate of the building with the NHBRC. The cost

    is 1.3% of the valuation and is for the client's account. It is normally

    included in the contract price and will be part of the first draw on the

    bond. The certificate guarantees the client that the home will be completed

    if the builder reneges, and if there are any structural defects, the NHBRC

    will ensure that it is corrected at no cost to the client.

  • A comprehensive building contract outlining the building costs and a

    schedule of finishes.

  • Plans approved and stamped by the council. The bank will use a draft

    plan to do the assessment, but require the approved plans to pay the

    builder.

  • The builder's short-term all risk insurance policies.

  • Soil poisoning certificate.

  • Letter of appointment of an engineer.

The bank will retain the full contract price and pay as work progresses. In

some cases they may hold back a small sum to ensure the building is completed.

The client will sign a letter of satisfaction, and either architect or client

will sign the completion certificate.

The client should keep the draw forms in his possession as the bank will only

pay out funds to the builder once they have been out to do an inspection and the

builder presents them with the original draw form signed by the client or owner.

It is not wise to leave signed blank draw forms with your builder.

It is advisable with building loans to take out a mortgage bond. The bank will

protect your interests as the property under construction is their security and

strict control will be maintained by the bank assessor.

Remember to take into account that whilst the home is under construction and

progress payments are being done, the balance of the home loan will increase

after every draw, so the interest that accrues on the loan must be paid. If not,

it will impact on the last draw. If no credits are received the interest will

compound and eat into the retention amount, and there will be insufficient funds

to complete the project. Certain banks offer a 104% home loan to assist with

cash flow, so ask your bank if this option can apply, providing your income can

service the higher loan.

There is a great deal of satisfaction in witnessing your dream house being

built, and if the above tips are heeded, it should be a stress-free transaction.

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