Types Of Contract

You will hear the term ‘2 part contract’ and ‘1 part contact’. A ‘2 part contract’ is when FHB’s sign a contract for the land and a separate contract for the construction. The land is settled and the title is exchanged with the name of the FHB, then the building commences and payments are made to the builder per the fixed build contract.

A ‘1 part contract’ is when the settlement occurs at the completion of the property, the title is exchanged with the name of the FHB. Effectively transferring the risk of the funding and finance to the developer up until settlement. At settlement, the titles are exchanged and the monies per the contract of the sale price are transferred to the developer.

A ‘2 part contract’, transfers the risk of funding towards the FHB. The land will settle initially and discharge the ownership and funding responsibility of the land to the FHB. This means that the FHB will be responsible for the repayments of the land loan from the settlement of the land, without having the benefit of a completed property.

The building contract is progressively paid to the builder as and when the stages are complete, this also means that the cost of the build will be borne by the FHB whilst the house is being constructed. Generally, during the construction, the repayment terms are interest only on the construction loan.

At the completion of the loan, you can work with your Mortgage Broker to combine the loan splits and revert to Principle and Interest repayments.

5% Deposit

FHB’s that only have a 5% deposit, need to ensure they have worked with their builder and financier in confirming when funds are due, this will be stipulated in the contract. If an FHB is relying on the First Home Buyer Cash Grant, you need to ensure the bank is an approved agent with the State Revenue Office (for a list of SRO Approved Agents see here ) will release the funds at the start of the build, as this will go towards the funds to complete the purchase. Some lenders will not release until after settlement, which means the FHBs will require to find additional funds to complete.

Progressive Payments

It is important to work with your Mortgage Broker around ensuring the progressive payment schedule (signed off between the builder and the First Home Buyer) is in line with the bank’s expectations. Some builders will push for upfront funding of stages, whilst banks will want to stagger the payments as work is completed. This allows the bank to have greater control over releasing the funds as completed and as valuations are returned. The industry standards are mapped out in the HIA guidelines (Click Here)

As if Complete Valuations

When a house and land application is submitted to the bank, an ‘as if’ complete valuation is performed. Which are the market value of the land and the commercial deemed value of the fixed build contract. With the capital appreciation of land, some lenders may allow the valuation to be used if it is higher than the contract price and depending on when the contract was signed. This depends on the bank’s policy and it is important to check with your Mortgage Broker and how this will impact your purchase.