What is the difference between a home loan and a building loan?
A home loan pays one amount when your loan is registered, while a building loan pays between 3 and 4 progress payments during the building phase. The qualifying criteria for a home loan and a building loan is exactly the same although some additional documents are required for a building loan.
Stages of a Building Loan
There are 4 stages in the building of a house and a set of documents is required at each stage, as outlined below.
Stage One – Application Stage
A copy of Provisional Plans. working drawings or Sketch Plans (plans, sections, elevations and a site plan are required)
A signed building contract, including a Home builder’s warranty, a builder approval form
A detailed quote or tender from the contractor
A schedule of Planned finishing dates
A copy of the Contractor’s NHBRC Certificate
Stage Two – Prior to Registration
The original NHBRC enrollment certificate, confirming that the property has been enrolled with the NHBRC.
The original authorization for the contractor’s payment (NHBRC form PA002). This form is required if you need the bank to pay the NHBRC levy from your home loan.
All risk insurance cover, covering the builder against any loss or damage that might incur during the contract period. Covering the builder against fire, lightning, explosion, earthquakes and storm damage, as well as against theft of any building material.
- Waiver of Builder’s Lien (required before the first progress payment can be made) The waiver explains the minimum requirements with regards to the materials to be used in the building process.Banks require the builder’s right of retention to be waived in favour of the bank (in writing); thereby making the bank the preferred creditor before any payment will be made.
Stage Three – Prior to First Progress Payment
Plans, approved by the relevant municipality
An engineer’s clearance certificate where applicable
Stage Four – Prior to Final Progress Payment
A building loan Letter of Satisfaction, signed by you once you have thoroughly inspected your new home after completion.
An electrical certificate and occupational certificate from you local authority
Any other specialised certificates regarding your property ( for example, a waterproofing certificate)
Features of a Building Loan:
- Progress payments
To pay these progress payments it is necessary for the builder to provide a detailed quote or tender with a schedule of finishes. Most banks allow between three and four, but a maximum of six, progress payments, made to the builder at intervals during the stages of construction, allowing you to pay only for the completed work.
- Monthly interest
Monthly interest on a building loan varies from one institute to another, but usually you can choose between a fixed or variable rate. Usually monthly interest shall be charged on each draw down payment you request. It is mandatory to start servicing your interest once your first progress payment is made.
Most banks offer you between 20 and 30 years to repay your building / home loan. Repayment of your loan only starts when the loan has been paid out in full, after completion of the building.
- Reputable builders
Only reputable builders, registered with the NHBRC, are allowed to build your home with a building loan, ensuring that your home is built according to the SABS standards.
Before you make the final payment to the builder, an occupation certificate must be issued by the local authority. This will ensure that the property has been inspected and all requirements are met by the local authority. The rest of the alterations are to be completed within the period stipulated by the loan.