Construction fund for a new-build or renovation
If you are you considering purchasing a new-build then you will likely encounter the word "construction account". This is also called a contruction fund.
What is a construction fund?
If you are purchasing a newly built home, you can finance it with a mortgage loan. The money from this loan is placed into what is known as a construction fund with your bank or lender. Such a construction fund is also referred to as a construction mortgage.
How does a construction fund or construction mortgage work?
A construction fund or construction mortgage is essentially a separate account from which the costs of building your home are paid. This includes costs for the land and the subsequent construction phases (also known as construction instalments). The mortgage lender will pay interest on the balance within the construction fund, referred to as construction fund interest. You submit the invoices to the bank, and the bank then pays these from the construction fund.
Construction fund for new builds
In most cases, a construction mortgage is used when purchasing a new build property. These often involve substantial sums of money. The bank or lender wants to ensure that the money from the construction fund is indeed spent on payments related to the construction of the new build home. A construction fund helps the bank keep track of this.
Construction fund for renovations
A construction fund is also used for renovating your home or refurbishing an existing property. With a renovation fund, you can purchase an existing home and, for example, renovate your kitchen.
Can you apply for a construction fund on an existing mortgage?
It is possible to apply for a construction fund later, after securing your mortgage. This means adding a construction fund on top of your existing mortgage. The mortgage lender will have conditions for this construction fund. The outstanding new mortgage and the construction fund together must not exceed 100 per cent of the property’s value after renovation (or 106 per cent if energy-saving measures are included). Your income must also be sufficient to responsibly manage the new higher monthly payments.
What can be paid from a construction fund?
As mentioned, a construction fund covers the costs of building or renovating your home. You can use a construction fund to pay for labour and materials used during construction, renovation, or improvement of your property. This applies to materials that are permanently attached to the house and cannot be taken with you when you move. For example, installing a wooden floor, fitting a new kitchen, or carrying out plastering and painting work. It is important to note that you can only claim expenses from the construction fund that were specified in advance when applying for your mortgage (including a detailed renovation plan or budget).
Calculating the construction fund
The amount in a construction fund is determined by the value of your property after the renovation. This value is established in advance by a surveyor. You can borrow up to 100 per cent of this amount. The size of a construction mortgage also depends on the type of renovation you plan to carry out. An extension or an additional room usually adds more value to your property than installing a new kitchen, which means the costs can often be fully included in the mortgage. In such cases, you do not need to contribute your own money to the construction fund.
Calculating the monthly costs of a construction fund
Would you like to know what the monthly costs of your construction fund will be? This depends entirely on how much money you have already withdrawn from the fund. Most mortgage lenders pay interest on the amount you have not yet used. This interest is then offset against the interest you owe. If you have not yet withdrawn any money from the fund, you will only pay the principal and no interest. The more money you withdraw, the higher the monthly costs of your construction fund will be, as you will receive interest on a smaller amount. Therefore, the monthly costs of your construction fund can vary throughout its term.
How to apply for a construction fund?
Your mortgage adviser can apply for the construction fund on your behalf. Would you like to learn more about the possibilities of a construction fund, or are you ready to apply for one straight away? Then make an appointment with one of our advisers.