What Every Home Builder Needs to Know About Building Loans and Draw Downs

When we first embarked on this journey to building our home, we know very little of how things worked and there was so much confusion over how the building loan actually works. We fumbled our way through things, made some mistakes and found our groove with the building loan. So, we’re here to answer your questions about building loans and hopefully save you some of the lost time and frustration we experienced when we first got started on our build.

What is a building loan?

If you are thinking of buying some land and building a home to your specifications, then a building loan is what you are after. Banks offer building loans specifically for this purpose.

Building loans differ to home loans in that the loan amount isn’t paid out in one lump sum. Building loans are paid out when certain milestones have been met, such as when a certain amount of the foundation has been laid and so on. We’re going to go into the draw downs in a little more detail to help you navigate your way through the process but before we get to that, let’s look at how to apply for a building loan.

How do you Apply for a Building Loan?

Most South African banks offer building loans and have staff who can assist you in applying for a loan. You can go directly to each individual bank and complete an application form.

We chose to go through a bond originator for a number of reasons:

• They can submit your application to all the banks at the same time, increasing your chances of getting a better rate and approval.
• The bond originator will also handle any queries from the bank, such as requesting additional information or documentation.
• If you are self employed or have overseas income, the bond originator can help you make sure you have all of the correct documents in place and help you present your financial situation in the best possible light.
• The bond originator can also provide advice on how to structure the loan, such as short or long term repayment plans.
• Finally, they will be able to negotiate with the banks to get you a better rate than what is advertised online.

We both have overseas businesses and a more complex financial situation and we firmly believe that without the help of Thea and Patrick from BondExcel, we would not have been able to secure a building loan and would not have been able to build our dream home.

Their expertise and attention to detail was invaluable in helping us get the loan we needed. We would highly recommend their services to anyone looking for a building loan or home loan.

What is Needed to Apply for a Building Loan?

The process of applying for a building loan is slightly different than applying for a home loan. As with a home loan application, the bank will want to establish your financial standing and capacity to repay the loan.

To do that, the bank will ask for:

• 3 months bank statements and salary slips
• permission to do a credit check
• proof of identity

Once your financial situation has been established, the bank will need to understand the build itself. Amidst all of the stress and practicalities of applying for the loan, you also get to dream at this stage. You see, the banks will need to see plans for your home – your dream home.

So, you’ll need to engage an architect and start planning exactly what you would like . Once the bank understands the plans, they will need to know what it’s going to cost and how much you are willing and able to contribute towards that cost.

So, with all that in mind, for the bank to understand the full details of the project, when you submit your building loan application, you will also need to submit:

• Plans for your home, site plan and provisional drawings. You will need an architect to draw these up for you.
• A contract with an NHBRC registered builder. This ensures that the builder works to strict standards and completes and quality product. This will also detail the cost of the build so that the bank can ensure there are enough funds to complete the build.
• Proof of the builder’s NHBRC registration. Builders receive an annual certificate of registration that must be produced before any building can commence.
• A lien waiver provided by the builder. This basically means the builder is waiving all rights to the property and any materials and labour used in its construction.

How long does it take for a Building Loan to be Approved?

Once you have submitted all of the information to the banks, it will take a about two weeks for the bank to go through all of your information and make a provisional offer. The offer will give you the specifics of your loan, including the interest rate and repayment terms.

If you accept the offer, the bank will appoint an attorney to take care of all of the legal elements of the loan. The bond will still need to be registered at the deeds office, which can take up to two months.

Once the bond is registered and all of the documents have been signed, you will be able to draw down on your loan funds.

Can you start building before your Building Loan is Approved?

Although you can start building while you are waiting for your loan to be approved, it would be better to wait until you have confirmation of your loan approval.

If you do start building before your loan is approved, it could result in complications and delays in getting that initial draw down from the bank.

Remember, you will also likely have to put down a deposit toward the build and the bank will require that you spend all of your deposit before releasing any funds from the loan.

Which South African banks offer Building Loans?

Most of the major banks in South Africa offer building loans, including FNB, Absa and Standard Bank. Depending on your individual circumstance, you should shop around to compare rates and fees from different lenders to find the best deal for your situation.

Do you have to make monthly bond repayments during the build process?

Whether you have to repay the bond during the process of the build varies from bank to bank and will be made clear when the bank formally offers you a building loan.

Establishing this at the outset of the build is important as you may well find yourself in a position where you will need to service the building loan whilst also paying rent or your current bond.

You will only pay interest on the funds already released by your bank during the build process, and not on the total bond amount. Speak to your bank about how this will work and when you will need to start making repayments.

When we took out our building loan, it was also stipulated that we would pay a slightly higher interest rate for the duration of the build which would then be lowered once we have complete the project and have moved in to our home.

How do Building Loan Draw Downs Work?

This is something that we initially struggled to understand at the beginning of our build so we’re going to try to clear up any confusion before you even get started.

The banks look at the total value of the property and will assign a percentage to milestones that have been completed. For example, when your foundations are complete, the bank may pay out 5% of the total value of loan.

The bank will send out a quantity surveyor to inspect the building works before releasing funds. He or she will let the bank know how much of the build has been completed.

Also, remember that the banks will only release money for the works that have been completed. This means that you will need to plan and budget for the entire project before you approach the bank.

It’s important to remember that banks will not release any more money than what has been agreed upon in the agreement. You should also remember that banks generally have their own set of rules and regulations when it comes to building loans so be sure to read these carefully before signing any contracts!

Our biggest piece of advice when it comes to draw downs is to speak with the bank assessor, if you can. It’s so important to understand the process, what the bank’s expectations are and how the assessor arrives at the figures for the draw downs.

This will enable you to better manage the finances for the build and forecast future draw downs so that you can allocate funds and budget accordingly.

How Long Does it take to clear funds after requesting a draw down?

This varies from bank to bank but in our experience, it take 5-7 working days. Once you have submitted all of the paperwork to request a draw down, the bank will arrange for their assessor to come to site. They will  take pictures and measure the work done since the last draw down. The assessor will submit his paperwork to the bank and only once the bank approves, will they release the funds. It’s important to note that you still need to meet the bank’s deadlines for completing each stage of construction in order to qualify for future draw downs.

Be sure to ask your bank about their exact process and timelines for approval and payment so that there are no delays in the build and workers do not have to wait for payment.

Summing It Up

There is a lot to think about when you’re considering building a house, finances and loans being one of them. If you understand how building loans work, how the draw downs work and consider suing a bond originator to help you secure the loan, you’re likely to have a slightly easier time during the build process.

If you have any other questions about building loans, please feel free to ask below. We’ll do our best to answer them for you!