Most people have to organise the finance to build, renovate, or buy a house. We look at what is likely to impact on your budget, and the options for borrowing.

Work out what you can afford

Before you launch into a building project or start looking for an existing house to buy, you should first work out what you can afford. This means having a realistic idea of your budget, taking into account all the other demands on your income.

Once you have an idea of your spending power you can start to look at houses or start investigating the costs of building.

Tip: Have a look at www.sorted.org.nz, an independent site that will help you organise money matters. It has tools and calculators to help you work out a budget and a loan repayment schedule.

Work out what it will cost

If you intend building, the next step is to get an idea of what you can do within your budget. You can:

  • Find out the value of homes and sections in the area where you would like to build by talking to a real estate agent or valuer. The location of the section can have an impact on building costs, as can matters such as ground stability and wind zones.
  • Research the cost of all the different materials you like, from the roofing and cladding to bathroom fittings and flooring. Get an idea of the cost of installing them. Some systems are more expensive to install than others.
  • Decide how much you will be doing yourself and how much you will be paying other people to do. Be realistic. Building invariably takes longer than you think. You might think you are saving money by doing it yourself but if you are not competent you could end up paying someone else to fix your mistakes.
  • Work out what new appliances you need and get prices.
  • Find out what builders and designers charge. Ask them if you can see other houses they have designed or built, and what those cost.

When you are talking to builders and designers, explain what you want to do. They have access to the latest building information on a per metre rate, and should be able to give you a ballpark figure.

Armed with this information you should get a reasonable idea of how much the total project is going to cost. Be prepared to prioritise. Make a list of what you consider ‘must haves’ and what might need to be reconsidered or deferred to stay within budget.

Effect of design features on costs

The design of the house will affect building costs. For example, it will cost more to build a house with a complicated roof and exterior wall design than a simpler house. Interior design involving higher ceilings, or lots of walls, windows and doors will add to costs. Have a look at Features and materials for ideas.

The type of design detail will also make a difference to how much you pay your architect or designer.

However, a good designer should be able to work within your budget to produce something that suits your needs, within reason. Some design aspects will actually save you money in the long-term. Passive energy design features like orientation of the house and large north-facing windows will save you money in heating costs. Spending a little more on good insulation will also save on heating costs.

Mortgages

Whether you are building or buying, once you have a good idea of what you can do within your budget, you need to start talking seriously to a bank, mortgage broker or other lenders.

Consumer has detailed information on the types of mortgages available, including the latest interest rates, how to apply for a mortgage, how to make a complaint if you are not satisfied with the service you receive, and how to reduce your payments. Some of this information is free, but for some you will need to be a member.

It is becoming more common for people to borrow money from organisations other than banks. These are known as non-bank or non-formula lenders. If you have been turned down by the banks, this may be an option, but if you are a risky proposition for the lender, you are likely to pay higher interest rates and fees. They may lend a smaller percentage of the property’s value than banks usually provide, so you may have to top up the difference some other way.

However, non-formula lenders can be a good option for people who want to pay off their mortgage more quickly. Some of these organisations encourage fast repayment. They may provide budgeting packages and consultants to keep an eye on you. And they may have schemes to help your debt reduce, for example, having your salary direct-credited to your mortgage account.

Insurance

Many banks will require you to have some sort of mortgage repayment insurance. This is usually achieved by assigning your life insurance policy to the bank.

Mortgage schemes

A loan option to be wary of is a scheme whereby a middleman - for example, a real estate investor - buys a property and then offers you credit to buy the property. These schemes are known by a variety of names including wrap-around mortgages, rent-to-buy, lease options, vendor finance, or installment sales contracts.

The problem with these schemes is that you don’t own the property until you finish paying, so you can’t sell and move somewhere else, or refinance, and if the middleman goes broke you will lose all the money you’ve invested.