How do I get my finance sorted during due diligence for a new-build property?

How do I get my finance sorted during due diligence for a new-build property?

Due diligence is a 10-day deadline between deciding you like a property and actually purchasing it. It’s a time where a potential investor applies for bank finance while still deciding whether it’s a property worth buying.

In this article you’ll learn exactly what you and your mortgage broker need to do during due diligence to get your lending sorted.

When should I contact my mortgage broker?

Most first-time property investors may be surprised to learn they don’t need to have lending approved to sign a contract.

That’s why many investors will get a property under contract first, and then head to their mortgage broker.

However, this is on the basis the contract has a “cancel clause” in the event you can’t get finance across the line.

Financial approval, or getting a “yes” from the bank, takes the most time out of the due diligence process.

At the time of writing, it can take banks up to 8 days to give you an answer - eating a big chunk into your 10-day deadline. So time is of the essence.

Mortgage broker Ella Dromgool, of Catalyst Financial, says she wants to see you as soon as you sign the contract, allowing her to get your application through as quickly as possible.

Use any broker you like - they don’t even have to be in the same city. Just “get it underway, fast,” is Ella’s advice.

How do I know if I can afford a property if I have to sign a contract first?

There are some instances where investors get in touch with a mortgage broker before signing a contract to get pre-approval.

A pre-approval is when a bank gives an offer of finance, which is conditional on you finding a property.

But in the current climate, some banks are too busy to offer pre-approvals to new customers.

Instead, these banks would rather wait to process your application once you have a signed sale and purchase agreement, or a ‘live contract’.

In this instance it’s worth using calculators, like the one below, to get a sense of how much an investor can potentially borrow.

These calculators are simple and work for first-time investors or those with three properties or less.

If you have a larger or a more complex portfolio, or if you are a business owner, it would be worth having a more in-depth chat with a mortgage broker.

Do I have to use a mortgage broker?

No, you don't have to, but it’s usually in your best interest to ensure your application is completed right the first time, saving you time and giving you a better chance of getting it approved.

A mortgage application requires:

• 3 months’ worth of payslips.
• 3 months’ worth of bank statements.
• 6 months’ worth of credit card statements (for each credit card).
• A copy of your passport.
• A rough budget of what you spend each month.
• A full assessment of who you are, what you do, and what you own, how many kids you have, are you self-employed, and do you have personal loans?

Miss even the smallest detail and the bank will likely return an application to ask for more information.

Again, this eats away at your 10-day deadline for due diligence, which means you may be pushed to ask your vendor, the person selling the property, for an extension.

However, with the market being so hot, extensions are hard to come by and there is no guarantee it will be granted. So you’ll be best served if you get it right the first time.

Initially, a broker will spend a lot of time talking with you upfront, about everything.

Ella says it can get personal when the bank goes through statements of a person’s day-to-day movements.

For instance, if they see an extra transaction labelled ‘mortgage’ going into someone’s bank accounts (if you’re helping a family member out with their mortgage) they might ask you about it.

“But don’t take it personally,” she says. “Banks interrogate everyone the same way.”

Currently, banks are even more particular about who they lend to because interest rates are at an all-time low.

What is my mortgage broker going to do during due diligence?

Mortgage brokers need time to work with the bank, in some cases multiple banks, so that if one says “no” they can try another one.

Every bank is different. It’s completely normal for one bank to approve your lending, while another will not.

“In fact, there are some weird, weird things you see,” Ella says.

Each bank has different lending policies and criteria.

For example, ANZ will not take into account income earned from overtime but Westpac will, so nurses applying for a mortgage are generally more suited to Westpac.

Similarly, BNZ has policies more favourable for women on maternity leave who are about to return to work.

That’s not to say that every nurse needs to work with Westpac, or expectant mothers should only head into BNZ, but it is worth accessing this kind of insider knowledge through a mortgage broker.

If your application is tight, and you're on the cusp of being approved or rejected, then a broker may be able to rejig your application to give it a better shot.

For that you might discuss unused credit card limits, extending mortgage terms on existing properties, or temporarily reducing KiwiSaver contributions.

How much does working with a mortgage broker cost?

Usually nothing. Mortgage brokers get paid when banks approve lending, so there’s added incentive for them to get your application over the line.

On the odd occasion, some mortgage brokers will charge fees, but most are free.

One extra thing to note is sometimes a bank will approve lending dependent on a registered valuation on the property. This typically costs $700-$800 and is organised through the bank.

If this is the case, your mortgage broker will send you a link to the bank’s system.

Just the same as any other transaction, simply put in your credit/debit card details to pay the fee.

Make sure you keep a receipt because the costs are tax deductible once your property starts earning rent.

What if I am buying a new-build property?

The key fishhook when purchasing a yet-to-be-completed property is that the bank will approve your finance for 3-12 months, but construction might take longer than that.

This means when it comes to settlement, or paying the developer, you may need to apply to the bank again to get your lending approved.

So while you have the finance approved today, you also need to make sure you can still get approved in the future.

This is why you shouldn’t be shocked if your mortgage broker advises you against buying a new car or having a baby in the short term.

Remember, it’s not personal, they just want to make sure you can get the money to buy the house when you need it.

How does my deposit work if I am buying a new-build property?

There is a difference between the deposit a developer needs and the deposit a bank needs.

Generally speaking, a developer requires a 10% deposit once the property goes unconditional. This is paid at the end of the 10-day due diligence process before construction starts.

However, a bank requires you to have a 20% deposit in order to approve your lending. But you don’t need the full 20% available until it comes to settlement, or when the build is completed.

Most investors will borrow this deposit and use the equity within their home or other property to finance it. So, to get ready for settlement, your mortgage broker will typically get the full 20% deposit ready straight away during due diligence.

For instance, if you are buying an $800,000 property, your broker might set up a $160,000 revolving credit.

But when it comes time to pay the deposit, you only need to pay the developer 10%. So, you’ll transfer $80,000 to the trust account of the developer’s solicitor.

Now you are left with a quite large revolving credit, where you could access tens of thousands of dollars during the construction period. Do not spend this. It is there to pay the rest of the deposit when it comes to settlement.

What are the final steps?

Once the property build is complete, your mortgage broker will get back in touch to release the rest of the money.

That’s when you’ll have a conversation about loan structures and what interest rates will line up with your goals. For example, whether you want to fix the rates for one, two or 5 years.

Until then, armed with your pre-approval, just rest easy knowing you have paid the deposit and the rest is ready and waiting.

Congratulations, you’ve just become a property investor.

Looking for more information about due diligence?

If you're looking to learn more about due diligence, check out these articles about: how to work with a solicitor during due diligence, how to work with an accountant during due diligence, how to work with an insurance broker during due diligence, what to do on a site visit, and everything you need to know about signing a sales and purchase agreement in NZ.