Could building be a way for first home buyers to get ahead?

I often get asked by first home buyers if building is a better option for them than trying to buy an existing house, based on a belief they will save some money, or that it’s easier. There can be advantages, but it’s not always easier or better.

First off, we need to differentiate, there are two key types of building contract, turn-key contracts, and land and build packages.

The best plan for a first home buyer is going to be a turn-key contract. This is where you pay the deposit nine months or a year later when the house is finished you settle on it as if it was a standard purchase. Essentially you are agreeing to buy a property in a year once a finish building it on today's prices. This gives the buyer the opportunity to save more during that time for a bigger deposit and not have to worry about the increasing market. However, you need to have the cash upfront for the deposit which maybe 10% of the total price, and if it has to come from KiwiSaver, you won't be able to get your KiwiSaver out again when it's time to settle. If the market goes down, you may be stuck overpaying for a house. But overall this is the better option for a first home buyer. There are not many of these out there, though it seems to be increasing, and more often they are apartments rather than houses.

The other disadvantage is that you are essentially paying retail for the house unless the house goes up dramatically in value before it's completed.

Land and build packages are where you buy the land, and then you pay for the build through what is known as progress payments (where, as work is done you draw down more of the mortgage to pay for each invoice until the house is finished). You may arrange the build yourself or it may come as a package deal with the land. For this option, you need to have a larger deposit, because you need to have 20% for the land, and the land price plus build cost. While the banks can go below 20% deposit they are wary of doing so unless there is good servicing on the loan. It's also much more complicated than a turn-key because you have to organise all the variables, and pay for the increasing mortgage as the work gets done (while also paying rent, or board depending on your situation).

The advantage of this is you often get much more control over what your house looks like, and often you are paying wholesale because you are paying for the cost of the work, not what the final market value will be.

The issue is with both is that there is a lot of work involved, the banks are cagey around builds because they've been burned before so want to make sure all the details are correct, and any small blowout on costs if servicing is tight could ruin your project.

However, for the right person, the right project, and the right time building is a great way to get a house. At DUX we do a lot of build contracts with clients, and as they take a while we work with you for the entire project. I myself am currently building a house which has recently started the construction after buying the land three years ago, dealing with all the complications of building consents and building on Wellington's angled sections. It can be stressful but focusing on the final goal is the key.

Don't consider building or buying off the plans without a lot of advice because there are so many ways for this to go wrong compared to buying a house. This is where the DUX team has decades of experience to help you through it.