Q on mortgage drawdown

Hi,

We're soon to embark on a house build. Although it's our first we know prices can escalate a bit. With that in mind we're wondering should we factor that in to amount we are requesting from the bank.

Let's say house costs 200k to build. Should we look for 220 from the bank so we have some contingency? (we have savings that are going towards the mortgage but I'm trying to keep figures simple here)

If we are approved for 220k and we only draw down 200K will we pay back interest on 220 or 200? What happens the other 20K?

I'm assuming that the LTV rate is calculated on the amount we draw down and not the amount we are approved for. Yes?

Sorry if these are silly questions. Your help would be appreciated.

P

You will only pay interest on what you borrow,
LTV is is the ratio between what is borrowed and the value of the property.
Yes you should allow for at least 5% contingency. Shop around for prices.
Good luck with the build.

No disrespect but it amazes me that people do not educate themselves on these things before borrowing such vast amounts of money.

Go for the maximum approval in principle saving you having to reapply if your initial thoughts on a price are less than what the actual cost will be.

Once you apply for a formal loan offer you will have to show costings from the builder/engineer/architect to support the amount you want to borrow.

Don't worry, on a self build project you will end up drawing down the whole amount!
In fact most lenders will require you to have savings to cover overruns.

Banks deal with the loan to value issue in different ways, some compare the mortgage amount to site + build costs (i.e loan to cost) resulting in a higher rate initially but once the house is completed they will then use loan to value that should result in a lower rate.

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Thanks to you both for your replies.

Niceoneted - no offense taken. I agree it is a lot of money. I was double-checking on some things. The only thing I wasn't sure of was to do with contingencies (our architect is doing out costings). And this is where I'm doing my research Only joking - but it's a good place to get a quick answer to a question.

NorfBank - thanks for that info on the LTV.

hi pisces
if you are building/ looking for 200k and appply for 220k tell the bank that the 20k is a contingency as they may look for a contingency aswell and be looking at 242k and not 220k