Almost everyone dreams of owning a house at some point in their life. Some people even dream of building their own house from scratch. No matter which group you belong to, a mortgage can make your home-owning dreams come true. Now you probably know that if you want to buy a home, a mortgage can help you with the funds you require. However, did you know that you can take out a mortgage for building a house too? That’s right! Whether you’re looking to buy a house or build one, a mortgage can help you get the money you need to be a proud homeowner.
How can I take out a mortgage to build a house?
A regular mortgage is a type of home loan you take out when you purchase a house. You make a down payment and the mortgage covers the rest of the purchase cost, with the house held as collateral. You then pay back the loan amount plus interest through regular mortgage payments.
If you want to build a house, you can take out a new build mortgage. A new build mortgage is a type of construction loan that you can take out to build your house. The main difference between a regular mortgage and a new build mortgage is that in a new build mortgage you don’t get the entire loan amount at once. Instead, loan pay-outs are staggered so that you can meet the expenses of constructing your house in stages (which is usually how construction payments are structured).
What do you need to get a construction loan or a new build mortgage?
There is a common perception that mortgages can be hard to get. This is especially true for new build mortgages as the bank or lending institution is taking a higher risk than a regular mortgage. The reason for the higher risk is with a regular mortgage, the lender has the house as collateral if you’re no longer able to make mortgage payments. In the case of a construction loan, you might still be in the middle of the building process! The lender would be stuck with a half-built home.
For this reason, you need to have all your construction details and potential expenses chalked out in a comprehensive manner. If you are partnering with a licensed construction professional, it will not be a problem as they will have these details compiled into a document referred to as a ‘blue book’. Of course, you can learn to make a ‘blue book’ on your own as well and build your house independently by liaising with multiple vendors. If this is the case, ensure it is as detailed as possible.
While getting a new build mortgage may seem challenging, just remember we’re here for you. Our mortgage specialists can help you with your build and assist you in choosing the right type of new build mortgage that will meet all your needs. What’s more, they will guide you through the entire lending process. Plus, they can meet with you outside of normal banking hours and get you the speedy approval you need.
What are the different types of new build mortgages?
Just as there are different types of regular mortgages, there are different types of new build mortgage options as well. Let’s look at some of them, along with the advantages and disadvantages of each.
Open Mortgages
An open mortgage allows you to pay off your mortgage according to your preferences and circumstances. With an open mortgage you can negotiate your mortgage payments. For example, you can choose to pay off a large chunk of your mortgage in one go, by making a lump sum payment. Or you may choose to make many small payments on a much more frequent basis than is normally allowed.
Advantages of Open Mortgages:
- You can make large payments without penalty. This is especially an advantage in case your income volume tends to be unpredictable, with windfalls and bonuses that could come in at any time.
- You can increase the frequency of your mortgage payments without penalty. In a traditional mortgage, you would have to pay as per the decided-upon terms and if you increase your payment frequency, you may be charged a fee. However, in an open mortgage, you can make payments as frequently as you like.
(Now, if you’re wondering why anyone would want to make frequent payments in the first place, then you need to consider that the longer your mortgage repayment term, the more interest you end up paying. By making frequent payments, you can pay off your mortgage quicker and avoid paying more as interest.)
- You can easily choose to refinance your mortgage. An open mortgage gives you added flexibility and puts you in a better position if you should choose to go in for refinancing.
Disadvantage of Open Mortgages:
As you can see, an open mortgage gives you a ton of freedom and flexibility when it comes to payments. However, these freedoms come at a price. Open mortgages usually charge a higher interest rate than closed mortgages. So, while you may be saving on penalties, you may end up paying more in interest. Thus, it is important to choose the type of new build mortgage you want with care.
Closed Mortgages
Closed mortgages are the opposite of open mortgages in that you must stick to the agreed-upon payment terms. If you choose to get a closed mortgage, you need to make your payments as per the pre-decided schedule. This could be monthly, once every two weeks or even weekly. You would also have to pay the amount you have agreed to pay - and cannot pay more than that without incurring a penalty. However, not everything is bad about closed mortgages. Let’s look at its main advantage.
Advantage of Closed Mortgages:
The biggest advantage of a closed mortgage is that the interest rate is lower than for an open mortgage. So, while you may be charged heavy penalties if you want to change your payment terms, you will at least not be paying a high interest on your mortgage. The easiest way to avoid those penalties and enjoy the perks of a lower interest rate? Keep your mortgage payments fixed; don’t try to change them if you can help it.
Disadvantages of Closed Mortgages:
- Paying penalties if you want to pay off your mortgage early by making a lump sum payment or want to make more frequent mortgage payments.
- Having to refinance in case you want to make more frequent payments.
- Refinancing a closed mortgage can be difficult and cost you in the long run.
Now that you know the difference between open and closed mortgages as well as the pros and cons of each, you need to consider the kind of interest rate you want.
What is a fixed interest rate? What is a variable interest rate?
As the name suggests a fixed interest rate stays the same throughout your mortgage term. It protects you from fluctuating interest. Fixed rates are a safer choice but can be disadvantageous if the prime rate decreases, and you are stuck paying a higher rate.
On other hand (and as its name also suggests), a variable interest rate can vary based on the prime interest rate. It can help you take advantage of dips in interest rates, allowing you to pay less interest. However, a variable interest rate can be risky as when rates go high, you will end up paying more.
So, which should you pick? As we said, it depends upon you. Most people choose a closed mortgage with either a fixed or variable interest rate. Contact us if you need help deciding. Ask your advisor for their suggestions on the best new build mortgage to suit your specific requirements.
Benefits you can enjoy when you choose Innovation for your new build mortgage
Ready to apply for a new build mortgage? We hope you choose Innovation. You can enjoy a range of perks that make it easier for you to build your new home.
- Access mortgage specialists to help with your build
- Choose from a variety of flexible mortgage options such as closed fixed mortgage, closed variable mortgage, etc.
- Enjoy competitive mortgage rates to save you money
- Get the money you need, when you need it with staged lending that allows you to track costs and maintain a more organized build.
- Earn cash dividends by banking with us — as an Innovation member, the more business you do with us, the more you earn.
- Be debt free faster with our 20/20 pay down options:
- Pay up to 20% of your original mortgage principal each year without penalty.
- Increase your monthly payments by 20% without penalty.
- What’s more, you can choose either pay-down option, or both to truly end your debt in a quick and easy way that suits you best.
Want more information on new build mortgages? Visit our New Build Mortgage page. We wish you all the best with your new construction.