Advice and Opinion

To build or buy a home?

The home buying process involves a number of important choices and one of the very first is whether to shop for an existing home or build a new one. Both decisions have their advantages and disadvantages.

“A home is usually the single largest investment an individual will make and there are many choices including the decision to build a home or buy an existing one,” says Tommy Nel, Head of Credit at FNB Home Loans.

The first port of call for potential home owners is to consider their budget.

“You need to look at all the costs when comparing building and buying,” says Nel. “Building is likely to be more expensive than buying a similar existing home because building materials and other costs include VAT which contributes to total project cost. However, transfer duties over R750 000 need to be taken into consideration when buying an existing home.”

The structure of a building loan also differs to that of a home loan.

“Although one loan is not necessarily more ‘suitable ’ than the other, it is important to be aware of the differences when deciding which route to take as it may affect your budget,” says Nel.

A home loan will be granted on your individual credit record and the value of the property you are purchasing. This amount will be transferred in full once the property is transferred to your name.

“The structure of a building loan differs from a home loan in that funds are only transferred as the building reaches certain completion milestones,” says Nel. “This is to ensure that enough funds remain available for completion of the property and that cost overruns are identified and addressed as early as possible in the process.”

A building loan is paid out at various points in the building process. The customer has 12 months to complete the building and construction work must commence within three months.

“Cash flow management when building a property is key,” warns Nel. “Many people don’t realise that they will need to fund the construction up to a certain level before qualifying for payments out of the building loan facility.”

Potential home owners also need to be aware that not all banks grant 100% finance on building loans so they may require a deposit and they will also have to have funds available to service the interim interest.

“The customer is responsible for paying interim interest until the building is complete,” says Nel. “This will accrue from the point where funds are first paid out, which is generally the transfer of the stand in the new owner’s name, through key points in the construction. These payments are known as progress payments.”

Once completed normal capital and interest payments become payable.

In addition to the interest repayments customers will have to budget for accommodation costs while building and cost overruns that invariable transpire.

Aside from the cost implication home owners will also have to take in account additional factors when deciding to build or buy an existing home.

Building is time consuming and complicated involving many different parties and additional paperwork.

“You will have to wait a much longer period for the completion of your home than if you buy on the existing market,” says Nel. “This means that you have to rent or fund another home while you wait for the completion.”

However, benefits of building your own home include the fact that you can design something that is exactly what you want and you will be the first occupant.

The advantages of buying an existing home are that you can view the physical structure before you make a purchase. There is also an advantage as the time span to occupy the building is far shorter and home owners will usually have transfer within three months.

The disadvantage of buying an existing home is that you have to take the house as it is and consider renovating or additions if it is not what you want.

“Deciding whether to build or buy is very much a personal choice,” says Nel. “With either it is key to have all the facts before you enter into a contract in this regard. It is further key that you understand your affordability position and the process involved before you make a decision.”