Summary Of Reserves

Summary of Reserve Accounts
Including reserves (a buffer) inside your loan reduces many of your out of pocket expenses not normally funded by a construction loan. These costs can all add up, and can cause unnecessary stress. If you don’t use all the reserves on completion, they are available to use on other things, or you can reduce your loan. Conversely, if you exceed these reserves, will need to fund the shortfall elsewhere.

A NewBuild loan has reserve accounts are set aside to cover both anticipated and unanticipated costs. In most instances, these reserves are optional.

Interest Reserves
Most who have built before agree that it can be very hard to pay the rent plus cover the construction interest costs while the home being built, so an interest reserve will go a long way towards reducing stress. Because banks include your current rent when calculating affordability, the overlap period with a construction loan often reduces your affordability to build, or prevents you from qualifying altogether.

The estimated interest costs are set aside to cover the construction loan. You will only be charged the actual interest on the loan as it is progressively drawn down. This cost still adds up, and can be quite difficult to pay on top of your rent or existing mortgage. This process of adding interest is called interest capitalisation.

The interest rate throughout the build is the current floating rate. You may elect to fix a portion of your loan (i.e. The section portion), but once the loan is fixed, you must make the mortgage repayments on that portion of the loan.

Ocassionally, and especially with a low deposit, or if loan servicing becomes and issue, having an interest reserve may be compulsory.

Any unused Interest Reserves will be refunded to you on completion. 

Contingency Reserves
Contingency Reserves are not for any specific known costs, but to pay for variations or your “PC sums”.  You can use these funds to reimburse architect fees or building permits, fencing, curtains, or just about anything.

But the most valuable part of contingencies is at completion of your home. It may take several weeks for your builder to provide a code compliance certificate (CCC). So once the council has inspected your home and it passes inspection, you may wish to take possession. With sufficient contingencies ($5,000), you will be permitted to pay the builders final balance, and the bank retention required for completion can be held inside your contingencies. These funds will be released to you once we receive your CCC and close out the construction loan.

Any unused contingencies will be refunded to you on completion.

Owners Care
This is a reserve account specifically to cover items required to complete your home that are not included inside your build contract. Many builds become stressful because you normally have to pay cash for work outside your contract, and your bank will still require the work be completed before final payment. You cannot use your deposit to pay for these items, so NewBuild will allow you to include them in the “Acquisition Price” to ensure you have funding to complete.

Owners Care typically include driveways and paths, generic landscape and fencing if required, or even carpets.  They may not include structural works. The lender may want to sight the quotes, and may even pay these items directly upon invoice once the work is completed (please note that kitchen deposits should be paid by the client as the lender is generally unwilling to pay a deposit for work not yet in the house).

If you have been approved with a low deposit, the lender may restrict your owners care to $10,000, or possibly nothing at all.

Any unused Owners Care will be refunded to you on completion.

Inspection Reserves
In most metropolitan locations the inspection fee can be as low as $90, but from time to time that cost may vary without notice. NewBuild. A traditional bank progress payment may require a new progress valuation at a cost upwards of $300-$500 each time, so you can save significantly and get a better inspection for less.

Another benefit of an inspector is the additional qualified eyes to help catch any potential issues before your builder moves to the next stage. While the lender continues to hold liable the builder and the council inspectors to rectify issues before they become major, the inspectors can provide advice on quality of workmanship, and even recommend stop payment pending remediation.

Any unused inspection reserves will be refunded on completion of your build.

NewBuild Fee
Instead of charging for multiple prgress valuations, NewBuild charges a small set management fee. This is capitalised into the loan and deducted at the first progress payment. Some lenders require your funds be distributed to a solicitors Trust account for payment to the builder. This is normally very expensive, as the solicitor will charge for the use of the Trust Account plus the disbursements. The NewBuild fee may change from time to time, but is currently $1000, included in your loan.