Construction Mortgages – Turn-Key vs Progress Payment Contracts

Building a new home presents an exciting opportunity with potentially more flexible financing than existing property purchases. The Reserve Bank of New Zealand has encouraged new builds through adaptable lending guidelines. Before construction begins, homebuyers must choose between two primary contract structures.

Turn-Key Construction Contracts

A turn-key arrangement means the completed home is ready for occupancy. Buyers typically pay 10% upfront with the remaining 90% due upon completion and receipt of the Code of Compliance Certificate.

Advantages:

• •Simple payment structure with no interest during construction
• •Cost certainty from the outset
• •No mortgage payments until settlement

Disadvantages:

• •Generally costs more than progress payment alternatives
• •Higher risk if construction extends beyond the pre-approval validity period (typically 6-12 months)
• •Requires reapplication for financing if timelines slip

Critical consideration: always ensure your deposit is held in trust by your solicitor to protect funds if builders face financial difficulties.

Progress Payment Construction Contracts

Under this model, payments occur in stages as construction milestones are reached-land purchase, foundation completion, framing, roofing, and beyond.

Advantages:

• •Finance secured from day one, eliminating reapplication concerns
• •Often slightly less expensive than turn-key arrangements
• •Banks favor this structure, offering greater flexibility

Disadvantages:

• •Increased administrative requirements
• •Mortgage repayments increase gradually throughout construction
• •Tighter cash flow management needed

Practical Completion vs Code of Compliance

Some contracts distinguish between "practical completion" (when builders consider work finished) and CCC issuance (council approval). Builders prefer payment at practical completion to maintain cash flow, while banks typically require CCC before releasing final funds to ensure the property meets security requirements.

Legal Review Importance

Construction contracts require lawyer review regardless of builder reputation. Attorneys identify clauses affecting payment timing and identify excluded costs for driveways, fencing, and site preparation that could surprise buyers.

Selecting the Right Option

Turn-key contracts suit buyers prioritizing simplicity and predictability. Progress payment contracts offer flexibility and often unlock lending unavailable for turn-key builds. Individual circumstances, deposit size, and borrowing capacity should guide the decision.