The 20/20 House – FINANCE EDITION
The Gruen Eco Design blog about how to convert your dream of an energy efficient home into a reality.
FINANCE – WHAT TO EXPECT AND HOW TO GET IT SORTED IN TIME
I have spoken about finance a few times and all the struggles we went through. So, I thought I should write up a little post about what went wrong with us. To make sure you don’t go through the same struggles.
Obviously, before embarking on a new build or renovation works you should check with your bank or mortgage broker how much money you can borrow or how much cash you have available. Then organise a pre-approval from the bank, to make sure you know how much money you can spent.
When it comes to the actual built cost, ideally you should aim for a 10% buffer, to leave some room for contingencies. It is quite normal that some things change throughout construction and that you might have a few variations. The classic issue is if you hit rock during excavation. Therefore, make sure you have a bit of a security buffer and the contract amount is not your absolute maximum.
But also, you might change your mind on certain features, then add or change things throughout the process. Which can also lead to variations. More about that later.
FINAL FINANCE APPROVAL
This is where we ran into problems. It had taken much longer than we thought to get everything sorted for the building permit and for construction. Partially due to Covid and that led to some other complications and delays.
And while we had brief check ins with our mortgage brokers to tell him that we were still a while off, we should have had a proper discussion with him. Asking him what he would need for the final approval and what the time delay would mean for us.
In our instance, we were finally ready to sign the contract with the builder in early April 2021. Little did we know that end of March was the tax return deadline. Meaning that if we would have signed the contract prior to that. Our tax return from 2018-19 would have been sufficient. But now we needed the tax return for 2019-20. Which we hadn’t even started yet.
And, in our case, that meant we needed the 2 private tax returns as well as the business tax return. It took several weeks for the bookkeeper to update it all. We also needed a while to get our things together. And then the tax agent needed some time to get it all sorted and lodged.
COVID & GOVERNMENT FUNDING / RUNNING YOUR OWN BUSINESS
In general, banks don’t like it when you are not employed. As they see this is a much higher risk.
The next issue we ran into was covid and government fundings. When Covid and the first lockdown hit in March 2020 we had a couple of scary months in terms of business income. And we were really lucky that we got jobkeeper to help us over this time. We only had it for a few months. But it meant we didn’t have to let anyone go. Everyone could stay on full time, and we did not have to reduce any salaries. We were back to pre-covid levels within a few months. But for the banks this meant the business made a loss in the tax year. When you take away the government grants and payments. Which then meant on paper I personally had made a loss. Yes, they deducted the loss that the business made on paper (overall revenue minus government money) from my income.
Therefore, on their books I had made less money personally than the previous year. Meaning I was high risk due to inconsistent income….
This then meant that they would not count my income and suddenly we needed to get finance only from my partners income… What a pain it was. It took several more weeks. And different ways and strategies to prove that business was indeed doing well into 2021 and not making a loss.
After months and months, we got it all sorted and the bank was ready to approve or finance.
Or so we thought.
Then the next fun part started. Our plans, specifications and the contract had to be evaluated by the bank. Again, might sound straight forward. But sadly, they usually work with project homes and volume builders. So rather than looking at the actual design and quality of the house. They only check what a typical house should cost in your area. And according to them a house our size should cost a lot less. There was some explaining and educating to do.
Depending on where you are building and what the average build cost is in your area you might run into issues with the bank. If you are building a high performing, architecturally designed home, the bank might only borrow you a lower percentage (or you might need more equity). This is something you should investigate early on. We have heard quite a few stories of people that could not get finance from their bank because of this issue.
The next issue was that we had excluded some items for the builders’ quotes. As we will supply several things ourselves. Our plan was to wait for sales and to get the items when and where needed. And we were using different suppliers for different rooms etc. So now we suddenly had to try to get a complete quote for all our lighting, fixtures and fittings, door hardware, sanitary items, floor coverings and so on. This process also took several weeks.
And there were several phone calls and emails between us, the mortgage broker and the evaluator.
Once this was all done and approved the next fun part started.
ESTABLISHING OUR PROGRESS PAYMENTS
When building a house there are certain milestones on when the builder can raise an invoice. Starting with Base Stage. Followed by Frame Stage.
And each stage has a standard percentage. E.G. Base Stage usually has a progress payment of 15% of the total build cost. Frame stage has 20% and so on. However, when you are building a high performing home and even more so, using prefabrication. These payment terms don’t work.
Like with our project, there were lots of big-ticket items that needed to be ordered and paid early on. Like the SIPs panels and the windows. Hence our builder requested to change the percentages. In order to receive more money earlier on. But the bank said they could not do that. That this was to risky for them and so on. Meaning it took several weeks again and several discussions and emails. And even though at the beginning the bank was adamant they could not accept our proposed payment terms, they did.
HOME LOAN APPLICATION APPROVAL
Then finally on the 30th of September. Our application was formally approved. Hallelujah!
We were advised that it would take a few days for the documents to come through to our mortgage broker. Then they would be posted to us for signature. It took then another 4 days for the documents to arrive at our place via express post.
Since we didn’t want to risk any further details we filled out and signed all the paperwork and dropped it off the next day at the bank headquarters.
GETTING THE FIRST PAYMENT
As some of you might remember, our construction was well underway at this time. And that we had already paid a few invoices to our builder. We were holding out for the reimbursement from the bank. But surprise, surprise, this process also turned out much more complex than we thought.
Even though we had supplied the bank with all the documents they had previously requested, they suddenly were asking for more documents and documentation, plus the building insurance. Which we all supplied within a day.
On the 12th of October, about 2 weeks after getting the final approval we’ve received the ‘Commencement Pack’. A document where you have to fill out the payment details.
Like: Type of payment, invoice number, builders details. And whether this invoice needs to be paid to the builder or whether it is a reimbursement. Sounds easy enough, right? But not really. Each time we filled out the form and send it to the bank, they came back with further questions. Finally on the 20th of October the first payment was approved. It took several more days for the others to come through. But we had finally made it. It ‘only’ took us 6.5 months to get here…
But now all is running smoothly. And the following invoices have gone through with no problems…
The moral of this story is: don’t end up in the same trap that we did.
Be proactive. Do your homework. And don’t take anything for granted ?
Make sure you know which tax returns you need and that your have organised all the information and documents that the mortgage broker needs!