Many people build new homes from scratch as they feel it allows them to stamp their particular style on a property and gives them the ability to customize the home to their needs (something that is not always possible in a pre-existing property located in a heavily developed area). It may also simply be an unavoidable necessity as properties that match their needs and desires do not exist: this is the case with many seaside towns and rezoned, former farms on the outskirts of our growing cities where the residential area is completely new.
While newer homes are, generally speaking, more desirable, the construction and loan application process can be a complicated one with additional costs and risks. When unaware of these they can turn the building of a dream home into a nightmare.
In this series of posts we hope to provide you with the information you need to make informed decisions. If you then choose to by vacant land and build, it will be a handy guide through the process. Part 1 will look at acquiring the vacant land, Part 2 will look at the financing of your construction (much of the information here also applies to renovations and upgrades) and Part 3 will look at purchasing in a development.
So, Let’s start at the literal foundation of any building plan: the land.
While the purchase and home loan application processes for vacant land are very similar to those of buying an existing property, each bank has a different set of rules it applies.
As you will see these rules are quite different and are largely based on the risk the bank perceives in the bonding of vacant residential land and their desire for a share of this market.
For the four major banks these are the current positions (as of 02/09/2016):
- ABSA: Maximum Loan Repayment Term of 30 years; with maximum of loan amount equivalent to 60% of the value of the piece of land (this ratio is called the Loan-to-Value or LTV). Additionally the plot must be a minimum size of 150sqm and cannot exceed 25 hectares.
- FNB: Maximum Loan Repayment Term of 10 years; with a maximum LTV of 60%. The minimum sizeagain is 150sqm but at FNB the maximum size is 2 hectares.
- Nedbank – Nedbank is not currently open to offering loans on vacant land.
- Standard bank – offers a maximum term of 10 years with an LTV between 60% to 80% (based on client’s and property assessment). The minimum size of the vacant plot must be 120 sqm
So what does this mean exactly?
If you made an offer on a R200,000 plot, applied for a loan and your credit score and affordability were good AND the bank’s assessment of the property matched or exceeded the purchase price you might expect the following :
R120,000 (60% LTV) loan over 30 years. At prime (currently 10.5%) your monthly repayments would be R1097.69.
Note that you would need R80 000 in cash to make up the difference of the purchase price (not to mention the other costs involved in purchasing and applying for a loan).
R120 000 loan over 10 years. At prime (currently 10.5%) your monthly repayments would be R1619.22.
You would need the R80 000 and the costs in cash.
R160 000 (80% LTV) loan over 10 years. At prime (currently 10.5%) your monthly repayments would be R2158.96
You would need R40 000 and the costs in cash.
So we see that if you are going to make an offer on a piece of vacant land you will need a sizable deposit. If you’re planning ahead budgeting for 40% of the purchase price would be advisable. But this scenario only takes into account a purchase with no immediate intent to build or for a loan only to acquire the land itself. Things slightly different when you applying to buy the land AND build on it. We will cover this scenario, in detail, in our post next week.