What Are Reserves?

Completion-final-statement Reserves take away the financial stress of building

It's important during your build that you don't run out of funds to get to a completed home.  Most construction loans assume you will need to pay any extra costs as you go, but NewBuild includes some "Reserves" to help you through your build.  All Reserves are part of your approved loan amount and all unused reserves will be applied to your account upon completion of your build loan.

Interest Reserves

While NewBuild does not require you to make any loan repayments during your build, you will still have a construction loan. NewBuild provides Interest Reserves in your NewBuild Construction Loan to allow the interest capitalisation feature to remain in place for up to 12 months. 

Any delays in starting construction may deplete your Interest Reserves so you may need to start loan repayments sooner if these Reserves are depleted. 

After 12 months, if your home is not competed, you will be required to commence making monthly or fortnightly interest and principal payments on the loan limit.

You can reduce the amount of monthly interest being capitalised by paying your wages and salaries into your NewBuild Construction Loan from the first draw down.  The loan operates like a large revolving credit facility, so any funds you pay in reduces the loan balance which in turn reduces the amount of the monthly interest charge. 

You can also pay into the NewBuild Construction Loan any surplus funds you have.  Of course, any monies you pay in are available to be drawn out (once the funds are cleared) and are identified in your NewBuild Construction Loan account as “Redraw Funds”.  You may decide to leave funds behind each month and make voluntary payments.   Salary crediting is a great benefit and one most of our NewBuild clients fully utilise.

AII unused Interest Reserves at the conclusion of the build can be used for additional home items such as drapes and blinds, landscaping, etc.

Compounding Interest

Because you are not being forced to repay the loan during the build, there is a small compounding (interest on interest) effect on the unpaid monthly interest.  This may be as little as $100-200 in extra costs on a typical build loan, but normally a small price to pay so you don't have to pay rent and a construction loan at the same time.

NewBuild Contingency Reserve

After almost two decades of residential construction lending experience we would like to think we have seen and experienced most hic-ups with builds.  One aspect that can occur is cost over runs.  This can occur through Prime Sums (PS Sums), Provisional Cost Sums (PC Sums) or unreasonably priced Allowances being included in the fixed priced build contract and the final price coming in above the stated amount.

PS Sums, PC Sums and Allowances mean that they are subject to change.  Example:  Earthworks could be a PC Sum of $15,000.  When the earthworks have been completed the actual cost comes in at $18,000, so the additional $3,000 cost is passed on to you.

These additional costs during the build, especially if you are paying rent and the construction loan interest, can be very stressful.  That is where NewBuild helps.   The NewBuild Contingency Reserve (may range from nothing to a maximum  of 5% of the build contract price) is designed to specifically cover any unexpected cost overruns associated with the build. Expected cost overruns should be included within your "Maximum Allowances". Once your build is successfully out of the ground (where most cost overruns occur), you may choose to use the NewBuild Contingency Reserve for home upgrades, such as upgrading the kitchen fit out, additional heating requirement etc.

In addition, NewBuild makes a small portion of the Contingency Reserve unavailable to ease the retention of funds requirement by the bank pending CCC (Code Compliance Certificate) at handover.  The builder requires their final build invoice to be paid before you can take possession and for the lender to make this payment they require the Valuer’s Completion Certificate (valuer confirms the home has been built as per the original valuation), the Home Owner’s Insurance (replaces Builder’s Risk Insurance) and the CCC from the Council. 

In reality your new home has passed Field Inspection by the Council for issue of the CCC, but the actual certificate will not be issued for another 3-4 weeks by the Council.  So rather than wait around for another 3-4 weeks (incurring you more cost in rent) NewBuild can make final payment to the builder and you take possession of the home on the basis you have not fully drawn (retention) your loan facility, hence setting some of your Contingency Fund aside from day 1 for this purpose. Once the lender is given the actual Code of Compliance Certificate, the remaining Contingency Fund is released to you.

Any unused Contingency Reserves at the conclusion of the build can be used for additional home items, such as drapes & blinds, landscaping etc.

NewBuild Owner’s Care Reserve

There are occasions where you may wish to complete some items outside of the build contract yourself. For example, you have a valuable contact involved in laying driveways, paths etc. and their price is significantly less than that offered by the builder.  The lender will want to sight the Owner’s Care quotes, and may even pay these items directly upon invoice once the work is completed.  Owner’s Care items are available for NewBuild Construction loans where the lending ratio is 80% or less.

Inspection Reserves

It's true, NewBuild does not require multiple progress valuations, which can save you thousands of dollars, but we do require an inspection each time a progress payment is to be made.  This is a much better practice than some banks which pay directly off a builder's invoice without checking that the work is complete.  NewBuild builds in a small reserve, typically $500, to help offset this cost. 

The Inspection Reserves do not cover the cost of the valuation or the completion certificate. These occur either before or after the build loan, and must be paid out of pocket.