WHAT HAPPENS IF THE BANK DELAYS IN PAYING THE PROGRESS PAYMENTS?
It may seem an unusual thing to write a blog about, because when you’re working through the process of getting a new home built, starting to wonder what happens if the bank delays in paying the progress payments is probably the last thing you’re thinking about. But unfortunately the question comes up more often than you might think, once the build actually starts.
In our experience, there’s generally 3 reasons why the payments are delayed by the bank. And sometimes there’s very little you can do about them. Let’s chat through them so you can get an understanding of them.
But just before we delve in, there’s one general observation, and that is that most payment delays occur on the first payment that’s due. This is to be expected – the first time around in asking for money will always force any problems to the surface.
Loan Not Approved
So the first main reason for a payment delay is that the loan hasn’t been fully approved. This might sound surprising, but it’s quite common. The story goes something like this – you get pre-approval, then you sign the contract and pay the deposit from your own funds and then forward everything to the bank to finalise. In the meantime, the new build gets underway and then – bang – the first payment is due before you know it, and the bank are still scrabbling around trying to formalise the loan.
Getting a loan to the point where the funds are available is quite a formal and extensive process inside the banks – especially the bigger banks and especially since the royal commission review in 2018/19. We’re not here to be critical of the banks, but we’ve observed it many times over – it really can take weeks and weeks of things like postage, internal processes and discussions and interviews.
We’ve got two little tips around this first delay – awareness and follow up. Basic, we know, but effective. Just simply being aware that this is what often happens will mean that both you and the builder will be better prepared and organised for it. And just a follow up call or email every 2 or 3 days goes a long way – the squeaky wheel gets the oil as they say.
The next main delay is missing documents. And this can be included in the previous point of the loan not being finalised, or it can also happen after the loan is ready to roll. But it’s probably the most common of them all, and generally the easiest to fix. These documents could be permits, or builders insurance, or it could be personal information of the borrower that the bank needs to finalise their approval system. Banks need a lot of information to support the lending process and it’s not unusual for them to keep coming back for more.
The obvious thing to do here is to provide the documents. But why was the bank missing them in the first place? Apart from the obvious reasons such the customer or the builder not providing them, or the bank not asking for them, here’s some others we’ve seen –
1. The bank thought they’d asked for them, but actually hadn’t. Mmm, frustrating. Not much you can do about this one.
2. The bank had received them but the documents had got lost within the bank. Unfortunately we see this one more than we’d like to. A follow up call or email will always help here.
3. Confusion of the names of the documents. This is where the bank is calling a document one thing and the builder or customer is calling it something else. Good communication is always a help.
Awaiting a Valuation
The next reason we see for delayed payments is because they’re waiting on a valuation. This is where the bank engages an independent valuer to drive to the site and inspect the progress of the build. They then put a report back to the bank either confirming that the build is at the stage that the payment has been requested for, or that there’s more work to do before the payment should be made.
Getting a valuation is common practice, and should be expected in every build. But sometimes the bank will only organise one valuation throughout the build – sometimes the first one – and then just pay the others without a valuation. Except the last one, sometimes called the final payment or handover payment. The bank will always arrange a final inspection of the home once it’s completed, unless their policies allow them to use the Occupancy Certificate from the building surveyor – which happens after an inspection anyway!
But although a valuation is commonplace, what can vary is the amount of time this takes. Banks are often very particular about who they use to do the valuations and if the valuers are busy or away or sick or any other reasons you can think of, then you and the builder just have to sit and wait, that’s all you can do.
And the process involves that once they’ve been to the site, they then have to prepare the report, then send it to the bank, and then the bank have to get the report to the right person, and then the person has to approve it, and then it goes to the payment departmentPaymentPayment … you get the gist! Unfortunately we’ve seen this process string out to two and even three weeks – frustrating to say the least.
There are other various and sundry reasons why payments get delayed, such as the the work not being completed to the stage claimed – the builder’s fault here – and also the regular customer payments not being made to the bank on time (once the loan has already started to be drawn on) – the customer’s fault here.
But these two things are rare, for obvious reasons. The first is that the builder can cop a fine for claiming a payment that hasn’t been completed. And in the second instance, circumstances rarely ever change so quickly where the customer can’t or doesn’t pay the repayments to the bank right at the start of the loan process.
So what is the outcome of all or any of these delays we’ve discussed? Generally two things.
1. It slows the build process. Many builders won’t continue with the next stage until they’ve been paid for the previous one. And this is reasonable, but it does mean that the build time is going to be put back by however long the payment delay is, maybe even longer if they’ve had to swing their resources across to another project in the meantime.
2. Interest costs from the builder. It’s common practice for the builder’s to claim some interest where there are unreasonable delays. And they’re often not high amounts – a few hundred dollars at most. An interesting comment on this – the amount the builder’s charge is about the same as the interest you would have paid to the bank had the payment been made earlier (on time!).
It’s hard not to get frustrated with the bank over these delays, but simply being aware of the reasons behind it all will go a long way to helping you and the builder manage it. We’ve found that the people in the bank really do want to help you and make it run smoothly, but convoluted processes and detailed policies make it hard for them at times.
A regular call to your bank manager is always going to help!
Disclaimer. This blog is our opinion only. The information provided in our blogs is accurate and true to the best of our knowledge, but there may be omissions, errors or mistakes. The information presented in our blogs is for informational purposes only and we are not professionals, so the content we provide shouldn’t be taken as legal advice. We strongly recommend consulting with a professional before taking any sort of action. We reserve the right to change how we manage our blog and we may change the focus or content at any time.
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