Campbell Mattson, managing director of Location Homes and Stephanie Murray, director of SMM, discuss the post COVID economic situation in relation to construction and new build activity. You can read through the summary of the interview below or click the video link for the full interview.
Topic: Financing new builds
CM: Would it be fair to say that given the government's stance on how we will regenerate the economy post COVID-19, there is a real incentive to have new homes built?
SM: Absolutely, new builds are not a part of the recent restrictions banks have put in place in relation to the loan to value ratio. This decision was made in an effort to revitalise the construction industry and get more houses built-because that’s what we all need, want and what the government wants
Topic: Financial support available for those embarking on a new build
CM: Leading on from incentives and the need to get cash cycling back through our economy, what grants or other financial support is available to a person looking to build a new home?
SM: Primarily through KiwiSaver, there is the opportunity to withdraw for a first home purchase, while in addition there is a second part called the ‘home start’ grant. The application can be tough, and you need to be a KiwiSaver member for a minimum of 3 years, but it’s effectively free money. By choosing to build, you get double the amount per annum compared to the standard 3K for 3 years, 4K for 4 years etc… instead, 6K for 3 years, 8K for 4. So, a maximum of 10K for an existing home, or 20K for a new build
Topic: Financial advantage summary
CM: That can make a huge difference, particularly for those who are on the margin thresholds normally. That 15K-20K can make the difference between impossible and possible
SM: Absolutely, so with the combination of this KiwiSaver scheme and the fact that the banks can lend more money over 80% for the build, the process of embarking on a new build project overall is pretty attractive
Topic: Where to start
CM: Steph, as a finance professional, where do you recommend people start in terms of getting their finances in place as well as looking at the process of land and building?
SM: So people come to us at various stages, but the best time i think is right at the beginning when you are thinking about building. By engaging us at the start of your journey, we can discuss and advise you based on the land price you’re looking at and what your build budget is. By breaking this down we can reach an overall budget which you can then take to a building company with a total investment to work with, enabling them to provide you with an option that best fits your needs. This strategy reduces the likelihood of surprises coming up further down the road
Topic: Fear of the unknown
CM: From my experience, one of the biggest fears when it comes to the building process is fear of the unknown. Most people seem unsure of the costs to be considering and in addition, how much they are actually able to afford and borrow, which is typically more than they realise. So that’s where engaging services such as the ones you provide right at the start of the process, sets them up for success and a much more enjoyable experience
SM: Amazingly when people don’t realise how much they are able to borrow they also don’t comprehend what this translates to in terms of weekly payments. For example, a couple considers they have $700K available to start looking and find something for $750k, which they are able to borrow and fit into their budget. With the extra low interest rates, the payback amount per week ends up costing them an additional $25 for the $750K house. When the payments are broken down like that it makes people realise it’s worth pursuing what they want for the slight extra weekly cost
Topic: How to manage finances during a build
CM: One of the big fears too is how to manage mortgage payments while simultaneously trying to afford rent and other living expenses during the build process. This hardly seems viable for really anyone, how do people manage?
SM: This is one of the first points that is raised by a client. There are a variety of situations:
- people living in an existing place and wanting to build, but not wanting to move out until the build is complete
- keeping the existing property but putting it up for rent when they move into the new place
- or currently renting and building
In all situations, it is important to keep all outgoings down as much as possible.
There is one loan for the land: this is where all the cash you have is deposited, resulting in the loan you are repaying being reasonably low. We can also review interest only options and 30 year terms to keep the repayments down.
Next, for the build: these costs don’t typically occur at the start of the project, but further down the track, giving you some time to prepare. This isn’t always the case, but what normally happens.
e.g $550k and there might be 10 payments throughout the $500k of $50k each so as each one draws down and as each invoice comes from the builder that gets paid so you only owe what you have paid the builder at the time. Again this can be interest only or 30 year terms to keep the repayments down.
Topic: Why now is a good time to build
CM: So why would now be a good time to build? Specifically relating to the situation we see ourselves in with significant health risks around the world and somewhat unknown economic impacts?
SM: To summarise the primary points:
- Firstly, interest rates are low and the reserve bank has pledged to keep interest rates low for the next 12 months. The one year interest rate is 3.9% and the two year is 3.2%. I never anticipated to see interest rates get down to that low in my lifetime.
- Choosing to build means you are exempt from the reserve bank restrictions. You will receive double the amount of the home start grant and the purchase threshold is higher than if you were to purchase an existing dwelling.
- Not a financial point, but the opportunity to develop great relationships and have an even better experience than you typically would embarking on this journey due to an increase in supply versus demand. Businesses in this space are going above and beyond to deliver exceptional services. In short-suppliers attention is going to be divided between less clients.
CM: Ironically building during a time of depression or recession if you are in the position to do so, the risk is mitigated and you are actually going to get a better result and experience. The mathematics of supply and demand is simple; if you have too much work, or more than you’d handle on a typical basis, there is the possibility of quality and service issues
SM: I’ve actually built in both environments, and I know which was a better experience. Recently, completing a house in Wellington during boom time. The timeframes it took..not saying the quality of the build wasn’t great, but the timeframes were definitely pushed out, which wasn’t anyone’s fault, but the nature of building when demand is high
Topic: SMM services
CM: How can SMM help a person looking to get finance to build a new home. What’s the point of contact and process you run in your business?
SM: At SMM we go to the bank for clients and arrange their finance for them-this means we have a large range of choice in how we can finance customers' builds. One credit policy is not the same across the board for all banks. We understand which bank is right for clients given their circumstances and what is financially best for them in relation to interest rates, cash contributions and stuff. Therefore our team spends a lot of time financing builds at SMM, we have developed a guide, ‘Financing your Home Build’ which you can download that is a great starting point if people want more information before engaging with us. Meetings can be set up at your convenience, either via zoom, over the phone or on site, enabling us to go over what you want to achieve. Once we’ve the objectives have been clearly defined, we can provide the answers around budgeting, limits and what to do next
SMM Services: https://www.stephaniemurray.mortgage
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