What is Construction Finance? Unpacking Your Loan Options
Are you eyeing your next construction project and exploring your financing options? Partnering with the right lender can unlock a world of opportunities, expertise and insights.
This guide acts as an essential introduction to construction finance in New Zealand, a crucial tool for builders and developers. Read on to learn how to streamline your finances, improve cash flow, and minimise risk with advice from the Fortis Capital team.
What is Construction Finance?
Construction finance is an integral part of building projects in NZ, providing the specialised funding and management needed from breaking ground to completion. It goes beyond just providing finance. It's about strategically structuring capital to suit your project's size and complexity.
This ensures a project's smooth transition through each phase, from land acquisition and pre-development to construction and sell down. The right construction finance facilitates efficient and timely project delivery, a key driver of the financial viability of the transaction.
There’s a diverse range of lenders in NZ, so conducting thorough initial research and securing the right financial partner can help you turn your vision into a reality.
What is a Construction Loan?
A construction loan is a specific type of short-term financing that falls under the umbrella of development finance. It is the funds required to deliver the cost to complete the project.
Unlike a traditional home loan, construction finance is a short-term solution, usually between 12-18 months, advancing funds in stages as your project reaches specific milestones of an agreed construction programme. This ensures funds are advanced towards project related costs as work is undertaken.
During the build phase, you'll typically only pay interest on the drawn amount with the cost capitalised to the facility limit. Upon completion, the loan is usually either fully repaid from sales or refinanced into a residual stock facility.
Exploring the Benefits of Construction Finance
Smart financing choices are the foundation of successful construction projects in NZ. By making the right decisions now, here are the advantages you can gain:
Streamlined Financing: Progressively drawn construction finance can reduce your total interest costs. By providing a staged funding approach (often called drawdowns or progress payments), it injects capital exactly when needed throughout the project lifecycle.
Improved Cashflow: The staged disbursement advances capital for project expenses when they're due, keeping your contractors happy, your cash flow healthy and your project moving forward.
Risk Reduction: The staged payment structure of construction financing minimises risk for both lenders and borrowers. Lenders have greater confidence that funds are used efficiently and appropriately, while borrowers are protected from over paying contractors for work not yet completed.
Flexible Solutions: Construction finance is not a one-size-fits-all approach. From new home builds to large-scale developments, many lenders offer adaptable loan structures to suit your needs.
What to Look for in a Lender
The success of your construction project hinges on the support and guidance of your chosen finance provider. Here are some signs to look for that a lender has the expertise you need:
Experience: Look for a company with a proven track record and specialists in your region who understand the local construction and funding landscapes.
Tailored Solutions: Not all projects are created equal. Choose a lender that offers flexible financing options to suit the specific needs and scale of your undertaking.
Industry Knowledge: Experience matters. A lender with a deep understanding of the construction lifecycle can anticipate your needs and provide valuable guidance.
Transparency: Financing can be complex, so choose a company that prioritises clear communication and keeps you informed throughout the process.
Which Construction Finance Option is Right for You?
To keep it simple, we believe that deciding between non-bank vs. traditional bank construction finance providers depends on whether you place more importance on flexibility or price.
A non bank provider will often require less borrower equity in the project compared to main banks. They require very little and sometimes no presales and are happy to consider proceeding without the services of a third party Quantity Surveyor to verify the budget and monthly drawdowns. This flexibility means you can commence work quickly, limiting your time in the market. In exchange for this flexibility a non bank provider charges a higher overall finance costs to compensate the lender for the additional risk.
Alternatively, a traditional bank option will provide lower overall finance costs, however will be subject to a high level of presales, more equity and usually Quantity Surveyor involvement.
So in short, construction financing can be sourced from both bank and non bank providers and the best option depends on whether you place more importance on flexibility and speed or price.
Begin Your Journey To Securing Construction Finance Today
We hope that this guide has been a valuable introduction to the benefits and opportunities of construction finance. We’ve answered common questions and explored the value that this financing could provide to your project.
The next step? Book a personal consultation with the team at Fortis Capital. With over 30 years of industry expertise offering construction finance in NZ, we’re passionate about partnering with leading construction professionals. To discuss your needs, explore your options, and realise your vision, contact Fortis Capital today.