WILL THE BANK PAY THE 5% DEPOSIT ON MY CONSTRUCTION LOAN?
Bank Funding: Can I get my bank to pay the 5% deposit on my new home build construction loan?
Ok, so you can finance your home in a few different ways, from cash in your account right through to financing every last dollar with a construction loan. Most people end up somewhere in the middle, but if you’re arranging the finance so that the bank is paying for the whole bang lot, then read on – we’ve got some comments that will be helpful to you.
At the start, just work with your bank – or broker – in the early stages of getting your finance sorted, just like any normal lending process. The bank will no doubt drill into the detail of your spending and income to ensure they’re happy with it all, especially if they’re lending 100% of what you need to build your new home.
By the way, you night be asking – is it even possible to borrow 100%? won’t the bank need me to chip in with something? In principle, the bank needs somewhere between 10 to 20% of the loan amount from you. But in practice, this 10 to 20% can come from a number of avenues – other equity, family guarantors, etc. So the long answer is that yes there are ways to borrow the full amount.
Sign The Contract
Back to the point in question. When the time comes to actually fund the construction loan, the bank will want a signed contract. All good – this is where the 21 day finance clause comes into play to allow you to get finance in place before the deposit is paid. Have a read of our other article on that for more detail – Signing a building contract subject to finance approval. So once you’ve signed the contract, you give it to the bank and then they finalise the application and all is sweet.
Or is it?
Before the builder can start working on your new home, the contract needs to be ratified, or made ‘actionable’, and this is done by paying the deposit. So the builder sends an invoice through for the deposit and then you send it on to the bank for payment. But this is where things can go sideways for a bit, so listen in closely.
Request for Payment
When the bank receives a request for payment, they automatically treat it as a progress payment, or a ‘staged’ payment. In other words, they’re paying for work already done. But a deposit is not for work done, it’s to secure the contract so that the work can start. So what happens is that the bank asks for a copy of the building permit before they can issue the payment. But the builder can’t apply for the building permit until the deposit is paid. But the bank can’t release the 5% until they have the building permit. Checkmate. Ouch.
So here’s the secret: simple communication. Just make your bank manager or broker are aware in the early stages that the builder will need the deposit before anything happens, even the building permit, and that the bank will need to find a way to fund that money. In our experience, the banks have always found a way around it – whether it be a personal loan, or a waiver of that particular rule – and funded the deposit. Albeit after a few weeks of frustration, disappointment and annoyance on everyone’s part.
But you can avoid all of that by being aware of the loophole and making sure that it’s all sorted for when the time comes.
Keen to find out more?
Reach out to us. We’re here to help.