Explore Your Options for Financing Your New Home Build
When building a new home, you'll need to have funds available to cover the costs of the build. It is usually a good idea to include at least 10 percent extra in your budget to account for last-minute additions or any changes to the initial estimate.
The more extra wiggle room you can afford, the better; it is always better to have more money than you need, than to come up short. When financing a new home build, you have a number of options available to you. You should always do plenty of research before deciding on a financing method. Here's a general breakdown of some of the most common types of financing to get you started:
A mortgage is the most common way to get financing for a home. Aim to save as much as you can for a deposit. Most mortgages expect at least 20 percent of the cost of the home. It is possible to obtain financing with a smaller deposit, but you will have to obtain mortgage insurance, which can cost several hundred dollars per month. Once you have decided on your preferred lender, ask to be pre-approved for the loan. This way, you'll know how much you can get financed so that you'll know what your budget should be when working with your builder.Bank vs. Broker
You can obtain a mortgage by going through a bank or through a mortgage broker. By going through a broker, you can gain access to a wide range of mortgage options that you might not have found on your own, giving you flexibility in your choice.
In some cases, you pay a flat fee or a percentage of your loan amount to the broker, while in others, the broker receives a commission from the lender. It is important to note that the commission-based structure may influence the broker to recommend certain loan products that generate large commissions, even though they may not be the best option for your particular situation. Brokers can offer valuable advice, but do your own independent research as well to ensure that you are getting the right loan to meet your needs.
If you choose to obtain your mortgage through a bank, you'll cut out the middle man by going directly to the source. However, your options will be limited by the specific loan products that a particular bank offers.Fixed Rate vs. Variable Rate
Mortgages also differ in the types of interest rates they charge. With a fixed rate loan, you'll lock in your interest rate for a set period (typically 1-5 years). During this time, your interest rate will not change. The benefit of this is that your monthly repayments will not change either, making it easier for you to establish a monthly budget. If the standard interest rate rises, you'll still pay the same lower rate. However, if the standard rate drops, you'll be stuck paying more as your locked in rate is now relatively higher. At the end of the fixed period, you'll usually have the option of switching to a variable interest rate or refinancing your loan with a new fixed rate.
In a variable rate loan, the interest rate fluctuates along with the standard rate. This means that your monthly repayments will vary as well. This can make it difficult to budget when your bill is not always the same, so it can be risky. However, variable rate loans often give you the option of making extra repayments whenever you choose to without penalty, which can help you get the loan paid off faster.
A construction loan differs from a mortgage in that you don't have to take all of the money at once. Although the maximum loan amount is still the same, you can draw down from the loan as needed. This is a great option for those building a home because it can save you a lot of money on interest. With this type of loan, you'll only pay interest on the amount you have drawn down, whereas with a mortgage, you're paying interest on the full amount from day one.
Another benefit of construction loans is that many offer the option of paying only the interest while your home is under construction rather than having to make full repayments. You won't make any progress on repaying the loan, but you'll free up cash for any expenses related to the build. Construction loans are typically offered with a variable interest rate.
Your third option is to obtain financing through your builder. You'll typically find this option available with larger building companies. Although your options will be limited to just what the builder offers, it can be incredibly convenient to have your building and financing handled all in one place. Many builders also accept lower deposit amounts than banks would. However, because of their limited options, you may not get the best rates or additional features with your loan.