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
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.