Whether it is to build your ideal home from scratch or to make improvements to your existing property, chances are that you may need a loan from a bank to cover the costs of the building works. To avoid delays and unexpected pitfalls, it is important to familiarise yourself with the building process, each party's responsibility as well as the financial arrangements that will be applicable to the building loan.
Once your building loan is approved, the bank will instruct an attorney to attend to the registration of a mortgage bond (commonly referred to as a building bond) over the property. The bond serves as security for the funds that the bank will advance towards the construction.
Where to start when applying for a building loan
As part of the application for the building loan, and before the building bond can be registered, the bank will require certain building documents, such as: –
- The Building Contract concluded between you and the builder.
- Provisional Building Plans (note that the bank may also insist on the municipal approved Building Plans prior to registration of the bond).
- Proof that the builder is registered with the National Home Builders Registration Council (NHBRC).
- Waiver of Builders Lien (a document whereby the builder agrees that the bank's rights to the property in terms of the building bond will enjoy preference).
- Minimum Specifications, specifying the standard of construction that the bank expects from the builder.
- The Schedule of Finishes dealing with the interior finishes, such as taps, tiles, light fixtures etc.
- Proof that the builder has sufficient insurance over the building and the building materials for the duration of construction (commonly referred to as Builder's All Risk Insurance). Upon completion of the building, the obligation to insure the property will pass to you.
- Surveyor General Diagram (usually only if the property forms part of a new development).
It is important to note that the full loan amount will not be available immediately. Depending on your individual credit profile, you could be expected to fund a portion of the initial costs from your own funds upfront. The bank will only start to release funds from the building loan after registration of the building bond and then in stages as and when the building work progresses.
The bank will require a progress payment request from the builder, and signed by you, at each stage. There are usually between 4 and 6 progress payments. With each request for payment, the bank will instruct its own valuer to inspect the property and to confirm that the appropriate level of completion for that particular progress payment has been reached.
Documents required for the first request of progress payement
Additional building documents will be required at the first request for a progress payment, these include, amongst others: –
- The municipal approved Building Plans (if not already provided).
- Engineer's Certificate to confirm structural soundness of the foundation (further engineer's certificates will be requested later, such as for the first floor slab and the roof).
- NHBRC Enrolment Certificate. (Enrolment of the property with the NHBRC provides a 5-year warranty against structural defects. This certificate may also be called for prior to registration of the building bond).
Documents required for the final progress payment
The following documents will be requested before the final progress payment can be made: –
- Occupancy Certificate issued by the municipality.
- Letter of Satisfaction ("Happy Letter") whereby you confirm that the property has been completed to your satisfaction as agreed with the builder.
- Engineer's Certificate.
- Electrical Compliance Certificate.
- Electric Fence Certificate and/or Gas Compliance Certificate, if applicable.
Lastly, take note that you will start repayments on the building loan in monthly instalments as soon as the first funds have been released by the bank, even if it is just to service the monthly interest charges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.