Building Loans

Understanding shortfall

A shortfall occurs when a Building Bond is registered for a lesser amount than that of the builder’s contract / tender amount. In order to mitigate the risk the customer must have access to sufficient funds to cater for the difference. Often homebuyers are unable to meet this requirement post registration and transfer as they have not taken this into account, resulting in delays

The bank will require proof of the availability of the funds to cover the shortfall which will occur. This will ensure that the homebuyer has sufficient funds to complete their building project.

Understanding estimated cost to complete versus tender price

The bank will always calculate the cost of the construction of the dwelling / renovations based on current building costs. Therefore, if the contract price is less than the bank estimated cost to complete, there will be a greater shortfall which the homebuyer will be required to fund upfront before the bank will release a progress payment. Banks will always ensure that there are sufficient proceeds in the balance of the home loan to complete the construction.

Understanding progress payments

Bank will make progress payments after certain stages of completion of the construction subject to the work meeting the banks’ standards and/or regulatory specifications. Subject to there being sufficient proceeds in the balance of the home loan to complete the remainder of the construction.

Understanding interim interest

While the property is being constructed and the full homeloan has not been disbursed the homebuyer is paying a monthly instalment, which is required required to service the monthly interest. If the client does not pay the monthly interim interest instalment, there will be insufficient proceeds available to fully meet future progress payments.

Further Building Loans for Renovations

The same principles apply – progress payments and interim interest and must be aware of the shortfall.

Waiver of Builders Lien

The Waiver of Lien where the builder waives all the rights to the property, materials used in the construction of the dwelling as well as the cost of labour in favour of the Bank. It is a mandatory requirement of all banks.

What is a turnkey

A turnkey is a newly built dwelling (plot and plan type property) with the exception that the property has to be fully constructed before registration is effected.

Features of this property type:

  • No progress payments
  • Property is registered on completion
  • All building documents need to be submitted as the banks will perform valuation off the plans submitted

Builders All Risks insurance cover

This covers the builder, the bank and the borrower against any loss or damage that may be incurred during the contract period. The policy covers fire, lightning, explosion, earthquake and storm damage, as well as theft of building materials. If the builder has his own policy, the bank requires a copy of the full policy wording as well as proof of South African Special Risk Insurance Association (SASRIA) cover. It is the responsibility of the homeowner to put a Buildings Insurance policy in place when the dwelling has been completed to insure the asset.