9 Mistakes to Avoid When Applying for a Construction Loan
Building a home from scratch is one of the most exciting milestones you can achieve—but it’s also one of the most complex. Construction loans are a common way to fund a new build in New Zealand, yet many borrowers dive into the process unprepared. If you want your dream home to come together without financial hiccups, here are the key mistakes to avoid—and expert tips to get your loan and your build off to a solid start.
1. Failing to Plan in Detail
Before any lender will consider a construction loan, you’ll need to supply a clear and detailed project plan. This includes consented architectural drawings, a construction contract or fixed-price build quote, and proof of your income, debts and financial situation. A realistic and itemised budget—one that allows for potential blowouts—is equally essential. Without this preparation, your chances of loan approval (and build success) significantly decrease.
2. Choosing the Wrong Lender
Not all lenders treat construction loans the same way. Some specialise in new builds and staged lending, while others will avoid funding development projects altogether. Work with a mortgage adviser who understands the ins and outs of building loans in New Zealand. They’ll help you compare lenders, find the best rates, and ensure the terms align with your situation and your build.
3. Not Getting Pre-Approval First
One of the most common mistakes is committing to a build without first securing pre-approval. A pre-approved loan gives you a defined budget and lets the builder, agent, and council know that you’re a serious buyer. It also helps speed up the drawdown process once construction begins.
4. Overlooking the Loan Terms and Conditions
Construction loans are structured differently from standard mortgages. You’ll receive the funds in stages (called progress payments), and may only pay interest on the amount drawn down. But fees can apply at each stage, and interest rates may differ from those of a regular home loan. Be clear on what your lender expects and how the loan will function across the build timeline.
5. Budgeting Too Tightly
Many builds in New Zealand go over budget due to material price hikes, labour shortages, or unexpected delays. If you’re working with a tight budget, consider adding a contingency fund of at least 10–15% to cover the unknowns. This buffer could be the difference between a smooth build and financial stress.
6. Forgetting Insurance Requirements
Before any funds are released, lenders will require that you have builder’s risk insurance in place, along with public liability and possibly contract works insurance. These policies protect against damage or loss during construction and can cover materials on site. Your lender and builder should work with your insurer to ensure the cover meets everyone’s needs.
7. Failing to Monitor the Build
Once the loan is approved and construction is underway, some borrowers disengage. But it’s critical to stay involved. Regularly check in with your builder and your lender. Each stage payment often requires a valuation or inspection to confirm work has been completed. Keeping tabs on progress ensures payments are made promptly and helps catch problems early.
8. Overbuilding Beyond Your Budget
It’s tempting to include every upgrade and design feature you’ve dreamed about, but remember that construction loans are capped. Building beyond your means can affect your loan servicing and jeopardise completion. Work with your builder to prioritise what matters most, and don’t assume you can “sort the extras out later” unless you have the cash to back it up.
9. Not Understanding the Risks
Building a house is not risk-free. Delays in consenting, contractor issues, weather setbacks and inflation can all affect the timeline and cost. You may also be carrying interest costs on the land and staged payments while the house is uninhabitable. Make sure you understand the risks and work with a team—broker, lawyer, builder, and accountant—who can help you plan for them.
Ready to Build?
Construction loans are powerful tools for turning an empty section into a dream home—but only when managed correctly. With the right preparation, a clear plan, and the right team behind you, you can make the most of your construction finance and avoid costly surprises down the line.
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