Building Loans in South Africa

Definition:

A building loan is a loan granted to an applicant (borrower) for the purpose of erecting a building on a vacant stand. The building loan may include the purchase of the stand.

In some cases the applicant may already own a stand (i.e. It is already registered in his / her name) and the loan will only be required to erect the buildings.

After the bond has been registered the proceeds of a building loan are paid by means of progress payments, that is, the money is advanced in stages after completion of a certain portion or portions of the building.

Requirements when applying for a building loan:

1. Completed home loan application form

2. Supporting documentation (as required when applying for a home loan) i.e. Proof of income, proof of identity, bank statements etc

3. Land & building contract

4. A copy of at least the submitted building plans i.e. already submitted but not yet approved by the local authority

5. Schedule of finishes

6. Quotes / tender from the builder

7. NHBRC Registration certificate (Builder)

8. NHBRC Builders Enrolment Certificate (Property) – prior to registration

Rate & term options:

The interest rate applicable to a building loan during the building process is normally the prime variable rate plus a risk premium. Once all progress payments have been made, the client will then enjoy the rate the bank offers.

Retention:

Once the valuer does the valuation report, he will put on a full retention on the building portion of the loan & will thereafter make progress payments. The valuer may place a full retention on the loan, requiring certain documents e.g. NHBRC certificate or unit enrolment certificate.

Progress payment:

A progress payment is a payment authorized by the client and released by the valuer to pay the builder at certain stages of the building process. It protects the client against the builder walking away with all the money prior to completion of the building.

Progress payments are normally paid out at the following (minimum) stages:

• ? Foundation
• ? Roof level
• ? Finished project

(More progress payments can be done!)

Unique Costs:

• ? Drawing plans to be approved.
• ? Minimum fee for approving building plans.
• ? Local authority rates and taxes which must be paid during the building period – even if no one is living in the property after the purchase of the stand.

Interim Interest:

The bank will only pay out for work that is completed or materials actually used and will retain adequate money for completion. There are usually three or four progress payments to the builder prior to the completion of the house.

Interim Interest will be calculated on the loans daily balance that are made up of progress payments, any costs paid out as well as previously charged interim interest. It is important that the client budgets for this – if he does not pay the interim interest, there will be a shortfall at the end when the final payment is made. The customer should make part payment as soon as the first progress payment is made, to cover the interim interest. Provision must be made to cover the interim interest that can mount up during the building period. Failing this, the client will have to pay the shortfall when the last progress payment is made.

THE BUILDING LOANS PROCESS:

• ? The completed building loan application form, duly completed by the client, plus all the supporting documents (as mentioned above), have to be submitted to bank for consideration.
• ? If the building loan is granted, the bank will instruct the attorneys to register the mortgage bond, the costs of which are payable by the client.
• ? No payments will be made to the builder prior to registration of the mortgage bond.

THE OBLIGATIONS OF THE CLIENT ARE AS FOLLOWS:

• ? Inform the builder and the bank of any problems, concerns and delays.
• ? Sign progress payments only once the client is satisfied with the work done. At own expense clients can obtain expert advice if necessary – do not rely on the bank assessor only.
• ? Repay the building loan in monthly installments (Interest is charged at Prime Lending Rate on the Mortgage Bond from date of registration until final progress payment is paid out).
• ? Sign debit orders, stop orders or other payment instructions to pay the monthly installments – these can be processed to a current or savings account.
• ? Submit the electrical compliance certificate and the certificate of occupancy.

THE OBLIGATION OF THE BANK ARE AS FOLLOWS:

• ? Provide finance.
• ? Pay the builder on instruction of the client, but sufficient funds will be retained to complete construction.

? NB: The bank will always retain sufficient funds to complete the project irrespective of how much work has been done or the current value of the property.

THE OBLIGATIONS OF THE ASSESSOR ARE AS FOLLOWS:

• ? Assess the property using the plan, schedule of finishes, specifications and the building contract.
• ? Structure the retention amount and progress payments.
• ? Monitor the progress.
• ? The Assessor will always retain sufficient funds in order for the completion of the project.

THE OBLIGATIONS OF THE BUILDER ARE AS FOLLOWS:

• ? Conclude a building contract with the client.
• ? Build according to the contract and plans.
• ? Register with the NHBRC.
• ? Enroll the property being developed and pay the required enrolment fee. This fee may be included in the contract price.
• ? Provide all-risk policy until completion of the building.
• ? Provide waiver of lien – whereby the builder waives his rights to the property upon completion.

THE FUNCTIONS OF THE NHBRC ARE AS FOLLOWS:

• ? Register the builder.
• ? Issue the builder with an enrolment certificate.
• ? Ensure defects are made good.
• ? Investigate claims and complaints made in terms of structural defects.

WHAT ARE PROGRESS PAYMENTS? (Also known as draws or disbursements)

• ? Payments made by the bank, on instruction of the client, to the builder from time to time based on the progress of the building.
• ? Payments are only made on the client’s written request on the prescribed Request for Progress Payment form, signed by the client (all the mortgagors) personally.
• ? Clients are often requested to sign the above forms up front – this should never happen, as the client will not have control over the frequency of payments made to the builder!

IMPORTANT INFORMATION:

• ? The bank does not choose the builder. The building contract is between the client and the builder, and the bank is not a party thereto. The bank will not be liable for any act or omission by the builder, nor for any loss, defect or faulty construction work of any nature, or for any digression by the builder from the plans. Even if the assessor approved the work, the client remains liable to pay the full monthly installments.
• ? The assessor is representing the interests of the bank and the purpose of his inspections or assessments, is to determine whether there is building progress for the bank’s purposes and whether the property constitutes adequate security for the loan only and not to protect the interests of the client or to inspect and point out any defects of any nature whatsoever. The client is not to rely on the banks assessor when authorizing payment. The bank will not be held accountable if there is a value shortfall between the assessment amount and the client’s independent valuation, as the assessor is protecting the interests of bank. The Assessor will always retain (hold back) enough funds to complete the project.
• ? Interest is charged from the day the first progress payment is made and it is advisable to pay all this interest as soon as possible before the first installment is due to prevent any decrease in the retention amount and an increase of the interest due. Non-payment of this interest will reduce the amount available for building purposes (this normally becomes evident at the end of the project) and the client will have to obtain additional finance to pay the builder to complete the work if there is a shortfall.
• ? The bank cannot provide an electrical compliance certificate or certificate of occupancy and is further not obliged to provide these certificates.
• ? It will be in the client’s interest to visit the building site regularly to determine if the work is done according to the building contract, building plans and applicable legislation.

? All agreements and dealings between the client and the builder must be reduced to writing.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

When it comes to securing a loan to build a new home, it is essential for the owner to provide a range of additional documents to the financial institution before the loan will be finalised or payments can be made to the builders.

According to The Property Factor’s Tess Rodrigues, anyone who wants to use bank finance to build a new property must provide copies of the plans, a copy of the tender and building contract, a certificate from the National Home Builders’ Registration Council (NHBRC) and a schedule of finishes along with a detailed list of specifications.

The other standard documents, such as an Offer to Purchase, identity documents of the owners and proof of income must also be supplied.

Should the bank approve the loan, the conveyancing attorneys then needs to have the mandatory FICA documents, a copy of the approved plans from the municipal authority, a building contract and a waiver of a lien from the builder, a copy of the builder’s insurance certificate and proof that the property has been enrolled with the NHBRC.

The owner of the property will usually be granted a bond based on the value of the land and the improvements to it, which normally includes the buildings. Thus if the bank grants an 80% bond it means that the owner will have to find the balance of 20% on transfer of the property and registration of the bond.

Rodrigues says that the first stage of building has to be financed by the owner and only after that will the bank allow progress payments to be made to the builder. The progress payment must also be authorised by a bank’s valuer who will assess the work done and its approximate value.

Rodrigues says that generally banks will make four or five progress payments to the builder but as soon as the first payment is made, the owner’s home loan account is debited and this amount attracts interest from the outset and must be paid monthly.

She warns that anyone considering building a home should be thoroughly familiar with the loan terms and conditions otherwise he or she might be stuck with an incomplete home that needs to be completed.

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za