Budgets, Financing and Estimates Start with a Budget Budget overruns can lead to a contractual breakdown and possibly even a de- enrollment. Among other things, budget overruns can result from inaccurate estimates, expensive design changes and fluctuations in material and labour costs.
A thoughtfully developed budget can help avoid these challenges. When you’re thinking about your construction budget, you should break it down into project components, including land costs, site preparation, design fees, construction costs and finishing costs. Owners often underestimate the costs of permits and regulatory fees, and this can also contribute to cost overruns. Also, owners sometimes overlook the fact that costs can fluctuate depending on location, materials, labour and design complexity. A budget should include a contingency fund for unexpected costs or changes. If your budget lacks a contingency fund, you may be forced to choose between scaling back on your plans or overextending your finances. The specific amount will vary but it is recommended to set aside a contingency fund of 10-20 per cent of the total project budget. Understand Construction Mortgages Many owners will rely on a construction mortgage to help pay for their new home. Construction mortgages are short-term loans that owners use to finance the construction of a new home. Whereas traditional mortgages provide all the funding up front to purchase an existing home, a construction mortgage provides the funding in installments as certain construction milestones are reached. These instalments are known as mortgage draws or construction draws. Often a construction draw is paid once a particular milestone is reached,
such as when the foundation has been poured or the roof has been finished. Some lenders pay construction draws based on the overall percentage of project completion. The lender usually requires an inspection prior to disbursing each installment to confirm that construction is proceeding as planned. Keep in mind that the builder may be expecting to pay subtrades sooner than a construction draw may be disbursed by the lender, so you will need to be sure that you have enough money available to pay the builder. Most lenders will require detailed construction plans, a project timeline and a thorough budget before approving a construction mortgage. However, before applying for the construction mortgage itself, it can be helpful to seek pre- approval on a construction mortgage. Pre-approval can help give you a sense of how much a lender would be willing to lend you, and this will give you a better sense of how much you can afford overall. It is important to note that not all construction mortgages are alike, and many lenders have different terms. Some lenders put their clients into a variable rate construction loan until the home is complete, allowing the homeowner to lock in a fixed rate at or near completion. Others may offer the option to choose a fixed rate up front or a variable rate. Additionally, some lenders charge a premium or fees for the interest rate, so it is crucial for homeowners to do their research.
Hiring a Builder in BC: A Consumer Protection Guide
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