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I can't pay for my new home



This is a weird one that we’ve come across a couple of times, but we reckon it’s worth talking about. You’re lying awake at night worrying about all the things that could go wrong when you’re about to get a new home built, and then this question crowds into your mind – what happens if something goes horribly wrong and I can’t pay for my new home?


There’s really two ways to look at this question.


The first is to think of ways to prevent this from ever happening. But you might say, how can you cover for any and all contingencies? In the detail of it, no, you simply can’t. But as a principle, yes, you can set things up so that no matter what happens, you can still get the house paid for. It’s basically a form of insurance.


If you’re borrowing money to build your new home – which many people do – then when you get a loan from the bank, they look at your current situation and then assess things from that. So everything’s going fine at the moment, and all is fine and they give you a loan.


But the banks know that nothing’s guaranteed, so they always factor in a fall-back position. They consider all the ‘what-ifs’, and dare we say it, they consider game-changing events such as the death, disappearance or loss of income of a borrower. Not nice scenarios to be thinking about when you’re about to embark on the magical journey of a new home, but a reality that does happen in the big wide world.


So the bank then builds in a margin of safety into their contract with you. So if the unthinkable does actually happen, then they activate a plan. This plan involves two things – the bank making sure the contract between the borrower and the builder is honoured and the builder gets paid, and also how they’ll then recover that money from the borrower that’s defaulted.


This may involve the bank taking the home over, working with the builder to finish it off, and then immediately selling it. Or it may involve a loss-of-income insurance kicking in for a while until the borrower finds a new source of income. Or it might even involve a guarantor taking over the loan.


At the end of the day, the contract between you and the builder is safe, and the builder gets paid for their work. It will obviously cause a ripple and some stress but ultimately things will be ok.


But what about the scenario where you’re not borrowing money, but relying on your own cash to fund the home? This can be a bit trickier if something really goes south and you suddenly don’t have the funds to finish paying for the home.


Step one in considering this situation is to realise that the contract between you and the builder is legally binding, and just because a buyer unexpectedly doesn’t have the cash to pay for the home doesn’t mean they can walk away and leave the builder high and dry – the buyer still has a legal requirement to fulfil the payment obligations of the contract. Whether that’s a small amount of money or large amount doesn’t change the obligation – although it could certainly be the difference between sorting out the problem easily or with great difficulty!


Which is what it comes down to. If something awful happens and you find yourself without the needed funds, then you’ll need to immediately begin communicating with everyone involved. This will clearly include the builder, but also your bank and lawyer and accountant.


A solution may involve borrowing the balance, and using the partially built home as security for the bank to lend against. Or it might involve borrowing from family or friends. Or it might involve liquidating other assets to release funds for the home.


There’s no one size fits all in this scenario, so it simply involves lots of communication and a willingness to work hard to sort it out fast.


A couple of things to bear in mind. One is that the builder will charge interest for overdue payments. And this could really escalate if they have to stop work for an extended amount of time while the problem gets resolved. You’ll find that interest penalty rates will be built into every standard builders contract, and if a situation drags on for months it could run into thousands of dollars.


We’re not here to scare you, but it’s a harsh reality that the builder will be carrying significant costs through no fault of their own, so they have to offset those costs somehow.


The other thing to understand is that the problem won’t go away. The builder and all of the rest of the team involved – tradespeople, suppliers and professionals – will have expended their time and money and will want things sorted out. Which we think everyone would agree is fair enough.


Of course, there may be the situation where someone declares bankruptcy and literally walks away from everything. This is a very sad occurrence and heartbreaking to everyone involved. In that situation, the builder will often place a caveat or similar instrument over the land and partially built house in order to recoup as much of their costs when everything’s sold up, but it’s well known that very few people recover their costs in this state of affairs. Having said that – it’s rare for this to happen in the situation of a new home being built, phew!


Our simple advice is to think about the worst possibilities, but don’t overthink them. The good news is that if you’re considering these possibilities, then you’re being conservative and nothing is likely to happen!


Of course, you could also be asking what happens if something goes horribly wrong with the builder and they can’t finish the home … well, good question and we have a separate blog on that one – click here.


As always, reach out anytime for more information!


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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