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Building loan | Property law

Building blocks of a building loan

If you are planning to build your dream home or to make alterations to your existing home, you will probably need a building loan from a bank to make your dream a reality. A building loan is used to finance the construction of your house on vacant land or to finance renovations to your existing home. The difference between a standard home loan and a building loan, is that the bank only pays out the loan in stages as the construction process goes along, until completed. Most banks will refrain from making final payment until the borrower has signed off on the completed building or renovations

How to obtain a building loan

You’ll have to be at least 18 years old with a clear credit record before you can apply for a building loan from the bank.

When applying for the building loan the bank will, inter alia, require the following documents before the loan can be registered:

  • Approved building and site plans, usually drafted by an architect.
  • A detailed building contract between yourself and your chosen builder or contractor.
  • Proof that your builder or contractor is registered with the National Home Builders Registration Council (NHBRC)
  • Builders’ all-risk insurance policy over the structure and the building materials.
  • Specifications and finishes detailing the standard of construction.
  • Waiver of Builders Lien in favour of the bank, which means that the builder is waiving all rights to the property and that the bank’s rights will have preference.

 

Progress payments

The mortgagor (borrower) could be expected to pay an upfront deposit of at least 10% of the building cost, as the full loan amount will not be available immediately. The loan will be released in stages, through progress payments, after the building loan is registered.

The bank will need a progress payment request from the builder or contractor at each stage of the building process, and payment will only be made if the construction work is completed to satisfaction at each stage.

Ordinarily there are between 4 to 6 progress payments; additional progress payments will come at a cost. These payments will only be made against construction work already completed and depend on whether the bank is satisfied with the completion of each stage after their valuator inspects the property.

The final progress payment will be paid out once the building work has been completed and the inspection by the valuator has been finalised.

The following building documentation must be provided to the bank for them to release the final progress payment:

  • Approved building plans
  • Surveyor General plans
  • NHBRC enrolment certificate
  • NHBRC registration certificate
  • Occupancy certificate
  • Electrical compliance certificate
  • Engineer’s certificate
  • Letter of Satisfaction (“happy letter”)


Lastly, the borrower will have to repay the bank in monthly instalments from the date of the first progress payment made by the bank.

These are the key elements of obtaining a building loan in South Africa.  Contact one of our skilled Property Law experts for assistance in this regard.


012 – 452 1300 | info@vdt.co.za | www.vdt.co.za 

June 17, 2020
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