Construction Mortgages – Turn-Key vs Progress Payment Contracts
Building a new home is an exciting milestone—and one that’s often a little easier to finance than buying an existing property. The Reserve Bank of New Zealand has long encouraged new builds by offering more flexible lending rules. But before construction begins, there’s an important decision to make: how will your build be structured?
The two most common types of construction contracts are turn-key and progress payment. Each has its advantages and drawbacks, and which one is right for you depends on your finances, timeline, and risk appetite.
What is a Turn-Key Construction Contract?
A turn-key contract is exactly what it sounds like: the home is fully built and ready for you to “turn the key” and walk in. You usually pay a 10% deposit up front and the remaining 90% only when the home has been completed and receives its Code of Compliance Certificate (CCC).
Turn-key contracts are popular because they’re simple. After the initial deposit, you don’t make any more payments until the end of the build. There are no interest costs during the build because your mortgage doesn’t start until settlement. You also get certainty on the total cost right from the beginning.
However, simplicity can come at a price. Turn-key contracts are often slightly more expensive than progress payment contracts because the developer is covering the entire build cost upfront. They also carry more risk if the build takes longer than expected. Most pre-approvals last 6 to 12 months, so if the build runs over time, you may need to reapply for finance—which isn't guaranteed.
One more important note: always ensure your deposit is held in trust by your solicitor. If the builder runs into financial trouble, your money will be protected.
What is a Progress Payment Construction Contract?
With a progress payment contract, payments are made in stages as the build progresses. The first payment usually goes towards purchasing the land, and subsequent payments are made when key milestones are met—such as laying the foundation, completing the framing, and installing the roof.
The full deposit is typically paid at the start, and the bank releases funds progressively as each invoice is submitted. You start paying interest only on the amount that’s been drawn down, which means your mortgage repayments increase gradually throughout the build.
Progress payment contracts offer some benefits. You’re locked in with finance from day one, so you don’t need to worry about reapplying if the build takes longer than expected. These contracts are often slightly cheaper, too, since the builder doesn’t have to carry the funding cost. And from the bank’s perspective, progress payment contracts offer greater security, so they tend to be more flexible with them.
On the downside, there’s more admin involved. You’ll need to manage each payment stage with your bank, and if your cash flow is tight, juggling these payments can be challenging.
Practical Completion vs Code of Compliance (CCC)
Some construction contracts—whether turn-key or progress payment—require the final payment to be made upon “practical completion” rather than when the CCC is issued.
From a builder’s perspective, once the house is finished and the practical completion certificate is signed off, they’ve done their job. Waiting another few months for the council to issue the CCC delays their final payment, which can strain their cash flow.
Banks, on the other hand, prefer to wait for CCC before releasing the last funds. That’s because they want to lend against a completed, compliant property. If a CCC is unexpectedly withheld, the home may not meet the security standards the bank requires.
If your builder wants to be paid at practical completion, let your adviser and bank know upfront. Most banks can work with this if the paperwork is in order, but it’s better to plan for it early in the process.
Do You Need a Lawyer to Review the Contract?
Absolutely—always have a lawyer look over your construction contract. Even when you’re working with a reputable building company, there can be clauses in the contract that need closer scrutiny. For example, you might be required to make a large payment well before most of the work is complete, or there could be costs for driveways, fencing or site prep that aren’t included in the quoted build price.
These clauses aren’t necessarily sneaky—often they’re about managing cash flow or minimising costs—but they can trip you up if you’re not aware of them. A lawyer will help ensure the contract protects you as well as the builder.
Which Option Is Right for You?
Turn-key contracts are ideal for buyers who want simplicity and predictability, while progress payment contracts offer more flexibility and are often favoured by banks. Your mortgage adviser can help you weigh up the pros and cons based on your personal circumstances, deposit size, and borrowing power.
For some, using a progress payment contract will unlock access to lending that isn’t available for turn-key builds. For others, the streamlined nature of a turn-key build is worth the extra cost. Every buyer’s situation is different, and the structure you choose can significantly impact both your finance options and your stress levels.