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

Building Loans

A building loan, also known as a construction loan, is for those who would like to build their own home, exactly the way they want it. This product is utilised to finance the building of a dwelling or additions or improvements to a house. Once the building is completed, the building loan reverts to a normal home loan. Always keep in mind that the various banks differ with their specific requirements, this is only a guideline.

What is the difference between a home loan and a building loan?

A home loan pays one amount when your loan is registered, while a building loan pays between 3 and 4 progress payments during the building phase. The qualifying criteria for a home loan and a building loan is exactly the same although some additional documents are required for a building loan.

There are 4 stages in the building of a house and a set of documents is required at each stage, as outlined below.

Stage One – Application Stage

• A copy of Provisional Plans. working drawings or Sketch Plans (plans, sections, elevations and a site plan are required)
• A signed building contract, including a Home builder’s warranty, a builder approval form
• A detailed quote or tender from the contractor
• A schedule of Planned finishing dates
• A copy of the Contractor’s NHBRC Certificate

Stage Two – Prior to Registration

• The original NHBRC enrolment certificate, confirming that the property has been enrolled with the NHBRC.
• The original authorization for the contractor’s payment (NHBRC form PA002). This form is required if you need the bank to pay the NHBRC levy from your home loan.
• All risk insurance cover, covering the builder against any loss or damage that might incur during the contract period. Covering the builder against fire, lightning, explosion, earthquakes and storm damage, as well as against theft of any building material.
• Waiver of Builder’s Lien (required before the first progress payment can be made) The waiver explains the minimum requirements with regards to the materials to be used in the building process. Banks require the builder’s right of retention to be waived in favour of the bank (in writing); thereby making the bank the preferred creditor before any payment will be made.

Stage Three – Prior to First Progress Payment

• Plans, approved by the relevant municipality
• An engineer’s clearance certificate where applicable

Stage Four – Prior to Final Progress Payment

• A building loan Letter of Satisfaction, signed by you once you have thoroughly inspected your new home after completion.
• An electrical certificate and occupational certificate from you local authority
• Any other specialised certificates regarding your property ( for example, a waterproofing certificate)

Features of a Building Loan:

Progress payments

To pay these progress payments it is necessary for the builder to provide a detailed quote or tender with a schedule of finishes. Most banks allow between three and four, but a maximum of six, progress payments, made to the builder at intervals during the stages of construction, allowing you to pay only for the completed work.

Monthly interest

Monthly interest on a building loan varies from one institute to another, but usually you can choose between a fixed or variable rate. Usually monthly interest shall be charged on each draw down payment you request. It is mandatory to start servicing your interest once your first progress payment is made.

Repayments

Most banks offer you between 20 and 30 years to repay your building / home loan. Repayment of your loan only starts when the loan has been paid out in full, after completion of the building.

Reputable builders

Only reputable builders, registered with the NHBRC, are allowed to build your home with a building loan, ensuring that your home is built according to the SABS standards.

Before you make the final payment to the builder, an occupation certificate must be issued by the local authority. This will ensure that the property has been inspected and all requirements are met by the local authority. The rest of the alterations are to be completed within the period stipulated by the loan.

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