New construction mortgage
A mortgage for a new construction home can have unique benefits, such as not having to pay transfer tax and often coming with a completion guarantee. However, there are also specific factors to keep in mind, such as construction interest, construction deposit, loss of interest during construction, and additional costs for any changes or upgrades.
Cheaper than existing construction?
It is said that new construction is cheaper than existing construction. That’s not entirely true. It is true that you don’t have to pay any transfer costs or real estate agent and appraisal costs. But there are other costs that you do need to pay. These are the most important:
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Construction interest
Before you buy the home, the contractor usually already made a number of investments. Think for example of buying and preparing the land for construction. He may even have started building partially. Because the contractor has pre-financed and is missing the interest on that, he can ask you for a compensation amount. This is called “construction interest”.
Construction deposit
After the mortgage is closed, the mortgage amount is then deposited into a special account, from which the contractor is paid: the construction deposit. You receive an interest on this amount. At the same time, you start paying interest on the mortgage.
Interest loss during construction
Thanks to the interest you receive for your construction deposit, you initially pay little interest. As the construction progresses, the construction deposit becomes smaller and you receive less compensation. So the amount you pay monthly increases. The difference between these two amounts is called “interest loss during construction”.
Double housing-costs
While your new house is under construction, you still need to pay the rent for your current house or, if you already have a mortgage, the monthly instalments. Some mortgage providers allow you to include these double housing costs in your mortgage. By doing that, your housing costs remain affordable during the construction period.
