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When it comes to developing a new building, there are many choices of construction contract available, and it is essential to select the right one for you.


Most construction loans have a variable interest rate, however there are some available that operate as fixed rate loans.

When it comes to developing a new building, there are many choices of construction contract available, and it is essential to select the right one for you.


Most construction loans have a variable interest rate, however there are some available that operate as fixed rate loans.

If you are planning to use a fixed rate construction loan, you may end up with individual rate on your land loan and a different rate on your construction loan. Approval for a land and construction loan is different to an established home. Frequently the land and building purchase will need to settle separately. For that reason, your initial loan will be processed as two separate but simultaneous applications, one for the land purchase and the second one for the completed house and land cost. The second application will eliminate the first loan, leaving you with just the one loan.

Most lenders will also require that you build on your land within two years of actually settling on your land. You don't need to finish the home within the two-year time frame, you just need to start within two years of settling on your land.The construction of your home or completion of your major renovation will generally be conducted in stages, with payments required at the end of

As each stage of your home is completed, the builder will invoice you for that stage. Assuming you are happy with the work, you will submit that invoice, along with an authority from you instructing your lender to pay the builder, to your lender for payment. For major construction, your lender will generally also inspect the property and may value the property at each stage to ensure you will have sufficient funds to complete the process. Once all parties are satisfied, your lender will then pay your builder on your behalf.

The bank or lender only charges you on the amount of money you have drawn down, therefore your minimum repayment will vary depending on which stage your home has reached.

Buying Off A Construction Plan

Buying off a construction plan is actually quite fun due to getting a newly built house so that you do not need to worry about the maintenance. The downside is that you cannot physically eye up to your new home. You are buying something that does not exist yet with a few artist impressions and written specifications to fill the void.
The benefit is that they are often better value-for-money and you don’t need to fight each week at auctions. 
The other advantage is the deposit amount. We all know that saving for a big enough deposit to get you into the Auckland market is the biggest hurdle, but there are more tender rules around lending for off-plan homes, and you don’t have to have a 20% deposit like you would if you were buying an existing house.

Turn Key Contract

A turn key contract is basically a fixed price contract between you and the builder that defines a fully completed property or renovation, including landscaping, driveways, painting and flooring in the new property.
This contract only allows for minimal non-fixed costs, meaning that the costs shouldn’t blow out once construction is undertaken.
This contract is exempt from RBNZ (Reserve Bank of NZ) rules. That means you don’t need a 20% deposit - a 10% deposit (20% for investment properties) is required for turn key contracts, and some banks may even stretch to allow 5% in particular cases, making this an attractive option for those with good income but fewer savings.
Another benefit for the client is that you don’t make any loan repayments or pay any interest, until the property has been completed and settled. This benefit is allowing you additional time to save before you start the loan repayment.

Land And Build Contract

This contract is the most common type of construction loan, quite similar to turn key deal and builders love this type of agreement.
The main difference is that there are progress payments involved. These progress payments are funds that go to the builder at various stages of the project. This contract is more like a 'pay as you go' approach. You start paying interest on your loan as soon as the first payment is made, which is typically at the settlement of the land and your loan payment increases as each new payment is made.

Labour Only/Partial Contract

These contracts come in many forms but normally consist of a range of sub-contracts that are managed by either the client or a project manager. There might also be labour only arrangement with the contractor.

These types of contracts are commonly used in the case of relocatable home.

Lending for a labour only or partial contract is limited to the land value only unless the buildings are already permanently fixed to the land. LVR would typically be between 65% - 80% depending on the contract. The bank will also include a 10% - 20% contingency as these loans almost always go over budget. 


Other conditions for labour only / partial contracts:

  • Quotes for materials and subcontractors required upfront
  • Progressive drawdowns are made against invoices
  • Valuations for each drawdown stage are needed to ensure any cost blowouts are identified early

Buying off a construction plan

Buying off a construction plan is actually quite fun due to getting a newly built house so that you do not need to worry about the maintenance. The downside is that you cannot physically eye up to your new home. You are buying something that does not exist yet with a few artist impressions and written specifications to fill the void.
The benefit is that they are often better value-for-money and you don’t need to fight each week at auctions.
The other advantage is the deposit amount. We all know that saving for a big enough deposit to get you into the Auckland market is the biggest hurdle, but there are more tender rules around lending for off-plan homes, and you don’t have to have a 20% deposit like you would if you were buying an existing house.

Turn Key Contract

A turn key contract is basically a fixed price contract between you and the builder that defines a fully completed property or renovation, including landscaping, driveways, painting and flooring in the new property.
This contract only allows for minimal non-fixed costs, meaning that the costs shouldn’t blow out once construction is undertaken.
This contract is exempt from RBNZ (Reserve Bank of NZ) rules. That means you don’t need a 20% deposit - a 10% deposit (20% for investment properties) is required for turn key contracts, and some banks may even stretch to allow 5% in particular cases, making this an attractive option for those with good income but fewer savings.
Another benefit for the client is that you don’t make any loan repayments or pay any interest, until the property has been completed and settled. This benefit is allowing you additional time to save before you start the loan repayment.

Land And Build Contract

This contract is the most common type of construction loan, quite similar to turn key deal and builders love this type of agreement.
The main difference is that there are progress payments involved. These progress payments are funds that go to the builder at various stages of the project. This contract is more like a 'pay as you go' approach. You start paying interest on your loan as soon as the first payment is made, which is typically at the settlement of the land and your loan payment increases as each new payment is made.

Land and Build Contract

This contract is the most common type of construction loan, quite similar to turn key deal and builders love this type of agreement.
The main difference is that there are progress payments involved. These progress payments are funds that go to the builder at various stages of the project. This contract is more like a 'pay as you go' approach. You start paying interest on your loan as soon as the first payment is made, which is typically at the settlement of the land and your loan payment increases as each new payment is made.

Labour Only/Partial Contract

These contracts come in many forms but normally consist of a range of sub-contracts that are managed by either the client or a project manager. There might also be labour only arrangement with the contractor.

These types of contracts are commonly used in the case of relocatable home.

Lending for a labour only or partial contract is limited to the land value only unless the buildings are already permanently fixed to the land. LVR would typically be between 65% - 80% depending on the contract. The bank will also include a 10% - 20% contingency as these loans almost always go over budget. 


Other conditions for labour only / partial contracts:

  • Quotes for materials and subcontractors required upfront
  • Progressive drawdowns are made against invoices
  • Valuations for each drawdown stage are needed to ensure any cost blowouts are identified early

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