Category: Investor Loans

If you have received a quote for development or construction finance, you may have seen a line fee listed alongside the interest rate. It is easy to overlook, but the charging basis and quoted period can materially affect the total cost of a facility.

Understanding how a line fee works makes it easier to compare offers on a like-for-like basis. This is particularly relevant to development and construction loans, where funds are usually advanced in stages rather than as a single lump sum.

Line Fee Meaning Explained

A line fee is a fee charged for keeping an approved facility available. Depending on the lender and term sheet, it may be calculated on the total facility limit or on the undrawn portion. It is separate from interest, which is generally calculated on the drawn balance.

The distinction matters because a development facility is usually drawn progressively. Interest reflects the amount advanced, while the line fee reflects the lender’s commitment to keep the remaining approved facility available, subject to the loan terms.

Why lenders charge a line fee

When a lender commits a facility, it must maintain the funding capacity and capital allocation needed to meet future drawdowns. A line fee compensates the lender for that commitment, including periods when the approved facility remains partly undrawn.

This is particularly relevant to staged lending. On a construction loan, funds are released through approved progress payments, so the drawn balance may sit below the facility limit for much of the term. Where interest is charged on the drawn balance, a separate line fee may apply to the total or undrawn commitment.

What the fee is charged on

Not all line fees are calculated the same way, and the basis matters more than the headline percentage. A line fee may be charged against the total facility limit, which means you pay on the full approved amount, regardless of how little you have drawn. Alternatively, it may be charged only against the undrawn portion, which reduces as you draw the loan down.

The difference can be significant. On a facility where most of the funds sit undrawn for months, a fee charged on the full limit costs considerably more than one charged on the undrawn balance alone. Before you compare two offers, it is worth confirming which basis each lender is using, because two identical percentages can produce very different costs.

Monthly versus annual line fees

Here is where borrowers most often seek clarification. Some lenders quote a line fee on an annual basis, while others quote it monthly, and the two can look almost identical at a glance.

Consider a line fee quoted at 0.25 percent. If it is 0.25 percent per annum, the annual rate is 0.25 percent. If it is 0.25 percent per month, the simple annualised rate is 3.0 percent per annum before considering the charging base. The number looks the same, but the annualised cost is very different. Never assume the quoted period from the type of lender; confirm it in the term sheet.

Confirm whether the rate is monthly or annual, then calculate the dollar cost against the relevant charging base and expected term. Annualising fees helps place offers on a common basis, but the final comparison should also reflect the likely drawdown profile, extension fees and other conditions.

How a line fee differs from other costs

A line fee is only one part of the total cost of finance. It sits alongside interest on drawn funds and an establishment fee, which is typically calculated as a percentage of the facility and may be paid or capitalised at commencement. Extension, drawdown, valuation, quantity surveyor, legal and early repayment costs may also apply.

Because these costs interact, the headline interest rate does not tell the whole story. A loan with a lower rate and a monthly line fee may cost more than a loan with a higher rate and no line fee, depending on the drawdown profile and term. Our guide to lender’s fees explains how the main charges fit together.

What this means when comparing lenders

The practical takeaway is that a line fee should not be read in isolation. Three questions determine its practical cost: what balance is charged, whether the rate is monthly or annual, and how long the facility is expected to remain available. Confirm each before comparing offers.

More broadly, a funding offer is more than the sum of its rates and fees. The charging basis, loan term, extension provisions and conditions all shape cost and execution risk. Our guide on what to look for in a term sheet covers the wider issues to check before committing to a lender.

Talk to ASAP Finance about your funding costs

Better decisions are made when the cost of finance is clear from the start. At ASAP Finance, our term sheets set out how interest and fees are calculated so borrowers can assess the expected cost over the life of the facility.

If you are comparing development or construction finance and want to understand the full cost of a proposed facility, get in touch with the team at ASAP Finance to talk it through.

Equity in property can support short-term business funding where a standard bank facility does not fit the timing or structure required. The security may be an investment property, owner-occupied commercial premises or residential property. The amount available depends on the property, existing debt, loan purpose and repayment strategy.

Non-bank bridging finance can be useful where the transaction is time-sensitive and there is a clear, credible exit. The lender still assesses the borrower, purpose, security, equity position and ability to repay; property security does not replace those fundamentals. This guide explains how property can support business-purpose borrowing and where the main risks sit.

What is property-backed business finance?

Property-backed business finance is a business-purpose loan secured by a registered mortgage over real estate. The property provides primary security, but the lender will also consider the use of funds, borrower and guarantor position, existing debt, serviceability or exit, and any other security required. The property may be residential, investment, commercial or industrial, subject to the lender’s appetite and a supportable value.

How property-backed finance is structured

ASAP Finance generally lends on a first-mortgage basis. The amount available depends on the property type, location and supportable value, existing debt, loan purpose and overall risk profile. Current maximum LVR, loan-size and term parameters are set out in ASAP Finance’s lending criteria and relevant product page; the approved position may be lower for particular assets or transactions.

For example, if a commercial property is worth $2 million and existing debt is $900,000, the gross equity is $1.1 million. At an illustrative 70 percent LVR, total secured borrowing would be $1.4 million, leaving potential gross headroom of $500,000 before interest, fees, transaction costs and any lender-imposed buffer. This is an illustration only; the lender may adopt a different value or LVR.

Property-backed facilities are usually short-term and event-driven. A bridging facility may run for three to six months, or up to 12 months where the risk and exit support it. Interest may be capitalised, paid monthly or structured as a combination. Capitalised interest can preserve cash flow during the term, but it increases the amount due at repayment and must fit within the facility limit.

Facility size varies by lender and transaction. ASAP Finance’s current loan-size, term and LVR parameters are set out in its lending criteria, and should be checked against the proposed security and exit.

What lenders actually assess

A lender will start with the purpose of the loan, the property security, the borrower’s equity and financial position, and the proposed exit. None of these should be considered in isolation.

Security covers the property offered, its supportable value and the debt or other claims already registered against it. Equity is the buffer between that value and total borrowing. The exit strategy explains how the loan will be repaid, whether through a property sale, refinance or another evidenced capital event. The lender will also consider the borrower and guarantors, legal structure, use of funds and whether the exit is achievable within the proposed term.

Whether the borrower is buying commercial or industrial premises, bridging a sale or releasing equity, the same principles apply: a clear purpose, supportable security, sufficient equity and a credible repayment pathway.

Common scenarios

Property-backed business finance suits situations where there is a genuine property-linked repayment pathway. Common examples include:

• Buying your own premises. A short-term facility can help complete the purchase, with the exit usually being refinance to longer-term commercial lending, subject to serviceability and lender criteria.
• Bridging a confirmed sale. You have a property under contract, but the funds are not yet available. A short-term facility releases cash now, repaid on settlement.
• Releasing equity from an investment property. An unencumbered or lightly geared property can be used to raise capital for a defined purpose, with repayment coming from a sale, refinance or another evidenced capital event.
• Funding an acquisition deposit. Property equity may support a deposit or settlement where the lender is comfortable with the purpose and the repayment comes from a defined sale, refinance or incoming equity rather than untested future trading upside.

What gets a deal stuck

A property-backed facility depends on both the security position and the repayment pathway. Common issues that delay or prevent approval include:

• No defined exit: “The business will improve” is not a repayment plan. A lender needs a specific, evidenced pathway, such as a contracted sale or an assessed refinance.
• Treating it as ongoing working capital: Short-term property finance is designed for a defined requirement and exit, not to fund recurring losses or act as permanent working capital.
• A thin equity buffer: If borrowing pushes the loan-to-value ratio too high, there is little room for the lender if values or timing move.
• Undisclosed debt or caveats: Existing mortgages, second charges, or caveats that surface late slow a deal down and erode trust.

Understand the security risk

Using property as security means the lender may enforce its mortgage if the loan is not repaid. This is particularly significant where a home or core business premises is offered. Borrowers should understand the repayment obligations, obtain independent legal advice and make sure the exit is realistic before committing.

Structuring property-backed finance with ASAP Finance

Property security can be an effective way to fund a defined timing gap or business transaction, but it is not a substitute for a clear purpose, realistic exit and sufficient buffer. ASAP Finance assesses each transaction on its commercial merits, including the security, borrower, use of funds, equity position and repayment pathway, rather than forcing your situation into a standard product.

If you own property and are weighing up how it could support your next move, get in touch with the team at ASAP Finance to talk through your options.

True 100% development finance, where a lender funds an entire project with no equity contribution from the developer, is not realistic in the New Zealand market. Lenders generally require the developer to have a meaningful stake in committing capital. It reflects how development risk is shared, and how lenders protect against cost overruns, delays, and market movements that can erode a project’s margins.

The problem developers are usually trying to solve with 100% finance is how to fund a project with less equity. That is a different question, and one with practical answers. Through a combination of land equity, layered debt, and other financing tools, experienced developers regularly structure projects that require significantly less cash upfront than the headline equity requirement might suggest. This guide covers what is available, how each option works, and what is realistic for New Zealand.

What Counts as Equity?

While true 100% development finance is not available in New Zealand, experienced developers can reduce their cash equity materially, particularly where land equity is strong, but the outcome depends on valuation, cost-to-complete, margin, and lender appetite.

Land equity: The most common non-cash equity source in New Zealand development projects. If you already own the site, or are purchasing it below its assessed value, that equity is usually recognised by lenders as part of your contribution to the project. A developer who owns a site worth $800,000, unencumbered, is already bringing meaningful equity to the funding conversation before committing any cash. The higher the land value relative to the total project cost, the less cash a lender will typically require.

Cash equity: Capital contributed directly, either at land settlement or introduced progressively as the project gets underway. Most lenders require developer equity to be in the project before they advance their own funds, and the sequencing of that contribution matters as much as the amount.

Understanding what counts toward your equity position is the starting point for structuring a project efficiently. A developer who approaches a lender with a clear picture of their equity contribution, and where it comes from, is in a significantly stronger position than one who has not worked this out before the conversation starts.

How Developers Reduce the Amount of Cash Equity Needed

Land equity

If you own the site outright or have substantial equity in it, that value can do most of the heavy lifting on the equity requirement. A developer bringing a site worth $1.2 million into a project with a total development cost of $4 million is already contributing 30% equity before touching any cash. Depending on the lender and the project, that land equity position may be sufficient on its own to satisfy the equity requirement, leaving cash reserves available for contingencies and holding costs rather than the initial contribution.

Mezzanine finance

Where land equity alone does not cover the full equity requirement, mezzanine finance can fill part of the gap. A mezzanine facility sits behind the senior loan, secured by a second mortgage, and typically covers 10-15% of the total project cost. In practice, a developer who would otherwise need to contribute 25% cash equity might use a mezzanine facility to bring that cash requirement down to 10%, with the mezzanine lender covering the difference. Mezzanine pricing can be materially different and may involve higher margins, fees, profit participation or preferred equity economics.

No-presale non-bank lending

For projects that do not fit bank credit settings, a non-bank lender may assess the transaction on feasibility, equity, delivery risk and exit strategy rather than requiring presale cover.

This does not reduce the equity requirement directly, but it removes the presale burden as a condition of funding and allows well-structured projects to proceed on their own merits. ASAP Finance assesses development and construction loan applications often without presales, depending on project size, complexity and credit assessment.

Presale underwrites

For developers who want to access bank funding but cannot meet presale cover requirements without discounting off-plan, a presale underwrite is a tool worth familiarising yourself with. Rather than selling properties below market value to satisfy the bank’s presale threshold, a developer can engage an underwriter who agrees to purchase a set number of completed units at an agreed price if they remain unsold by a specified date.

The practical effect on the equity requirement is indirect but meaningful. Please note that underwrites are not equity and do not remove delivery, valuation or saleability risk. They can help satisfy bank presale conditions but are usually priced/discounted and subject to strict eligibility and documentation.

What Is Realistic for Development Finance in NZ?

True 100% development finance is not available in New Zealand, but the cash equity requirement on a well-structured project can be reduced significantly below the headline 20 to 30% most lenders cite. How far depends on the project, the site, and the combination of tools a developer brings to the capital stack.

What is unrealistic is expecting to fund a project with no economic equity. Lenders assess equity as a signal of commitment and a buffer against risk, and a project with no developer equity will not be funded, regardless of its structure. With robust feasibility and a credible exit, the right lender can help identify which tools are most appropriate and how to structure around them.

The more productive framing for most developers is not “how do I get to zero equity” but “how do I make my equity work as hard as possible.” The right lending structure makes that possible, while minimising property development risks.

Funding Your Development with ASAP Finance

At ASAP Finance, we work with developers across New Zealand to structure development and construction loans from site acquisition through to project completion. Our lending managers assess each project individually, drawing on over 20 years’ experience assessing what makes a successful development. If you are planning a project and want to work through how to structure your equity and funding best, get in touch with the team at ASAP Finance to discuss your plans.

Formulating a robust exit strategy is a critical part of the development process. When assessing an application for a development loan, the credibility of a clients’ proposed exit strategy will be reviewed and assessed in detail.

There are several ways a developer can exit a construction loan – the most common strategies being:

• to sell the development down, or
• to hold (and refinance any residual debt).  

No matter the strategy, a lender’s comfort around this area of the transaction is paramount as this is how they expect to be repaid. Failure to clearly demonstrate how funds will be repaid and how you can execute on your strategy will likely result in the funding application being declined.

Learn how to create an exit strategy properly below.

Recycling Profits

Selling down completed stock (be it dwellings or sections) to realise profits is the most common exit strategy property developers adopt. This strategy enables profits to be recycled from one project into another upon completion. This “rinse and repeat” model enables developers to quickly scale their business and grow profits.

Many lenders will lend more aggressively against a ‘sales strategy’. This is because a ‘refinance’ (or ‘hold’) strategy requires the residual debt upon completion of the project to be refinanced. This means that any initial development funding provided by the initial lender cannot exceed an amount the developer will be able to borrower in the refinance market.

Refinancing requires the developer to meet servicing criteria (at a future point in time) which is largely unknown when they start construction. Because lending criteria (and interest rates) are constantly in flux, development lenders will be conservative when providing funding to clients to intend to hold their product.

As a result of the above, most lenders will lend more aggressively when the developer adopts a ‘sale strategy’. This means that selling down properties is a less capital-intensive compared to holding – not only because they can obtain greater leverage but also because the developer’s equity is not tied into the project over the long-term. Therefor, a developer’s return on equity tends to be higher over the short term.

Of course, there is an argument for both exit strategies as over the long term, holding can generate capital gain that can exceed any short-term gain generated through development.

Pre-selling & Lending Criteria

Mainstream lenders such as banks typically require a certain number of pre-sales as a pre-condition to funding construction. In today’s environment, most NZ banks require between 100-130% presale cover to ensure that their debt can be repaid in full upon completion of the project. One of the reasons that (some) banks insist upon a pre-sale cover greater than their debt facility (say 130%) is to ensure that their debt can still be repaid should some purchasers default.

In contrast non-bank lenders have more flexible terms and can fund projects with no (or a limited number of) presales. They also have greater flexibility when determining what constitutes a ‘qualifying presale’.

If you have decided to obtain pre-sales, our suggestion is to always seek ‘bank’ quality pre-sales where possible (regardless of the individual lender’s requirements). Bank quality presales can be typically defined as follows.

• Unconditional (subject only to the issuance of title and CCC)
• Independent contracts sold through an agent
• No related party sales
• Minimum 10% deposit paid (for NZ residents, 20% for non-NZ residents) and held in a solicitors trust account
• Terms consistent with the proposed plans for the project
• Appropriate sunset dates are usually +12 months after the expected completion date
• Sales to individuals (as opposed to a company or trust). If a sale is to a company or a trust then obtain a supporting guarantee from the Directors or Trustees.
• Avoid multiple sales to the same party (as they will typically not be accepted)

Following the above principles will put you in a good place to obtain funding from most lenders.

Should You Pre-sell?

Pre-selling has its perks when it comes to risk management however making such a decision will likely have broader implications for your project, particularly its profitability.

Below we look at some key points developers should consider when making this decision:

Risk mitigation

This one’s obvious – there is a reason that lenders insist on pre-sales. Pre-selling locks in revenue and protects your downside in the event of a decline in property prices. It also establishes a robust (often bankable) exit strategy via a watertight contractual arrangement. Selling at the end of a project will expose the developers to changes in market conditions leading us to our next point…the property cycle.

The property market is cyclical

A firm grasp on what stage of the property cycle we are in will enable us to make more informed decisions when it comes to risk management and risk mitigation. Pre-selling in the growth phase will likely result in you leaving money on the table. A good example is a client who was building two-bedroom townhouses in Epsom, Auckland in 2020. Feedback from real estate agents (and an RV) had suggested an end value of $1.0m per unit. However, our client could see that the market was taking off and was convinced that his product would present better on completion. He decided not to pre-sell, instead listing his properties when they were nearing completion. Between starting construction and completion, the market had moved substantially and our client sold all ten units for greater than $1,150k per unit, a +$1.5M gain in revenue for the project.

Cost Escalations

What is the likelihood of cost escalations during construction? In recent years, property prices have skyrocketed; however, so too have construction costs. This created an interesting predicament for some developers who had sold off-plan. By pre-selling, you are locking in your revenue. This means that any increase in cost (no matter how minor) will directly impact profitability. We all saw the news article in 2021 where developers were trying to renege or renegotiate on pre-sale contracts. This is because construction cost escalation during the build had eroded their profits. In the meantime, property prices were well above their initial presale prices, giving them the incentive to try cancel presales to recapture a project’s margin. In such circumstances, ensuring that construction costs are fixed before starting a project, and retaining/holding back some stock are just some ways to mitigate the impact of escalating construction costs.

Off-plan discount

It is commonly accepted that selling off-plan/before the project has been completed results in the developer selling at a slight discount to market (up to 5% of the purchase price). This can be for various reasons including uncertainty about what will be delivered, time delays, hesitancy on what direction the market may head and so on. However, this is not a blanket rule. Some developers take advantage of this using comprehensive marketing packs and high-quality renders to upsell their development.

Supply and demand: understanding what competing stock is planned for delivery (and when) should inform your sales exit strategy. You may decide to sell on completion if there is no competing stock. If there is lots of competing stock, then it will likely be harder to sell on completion and days on the market will increase. If you are fully drawn on a construction facility, holding costs will quickly erode your development margin. In this instance, pre-selling (at least some) will enable you to reduce debt and de-risk your project.

Price validation: while agents and valuer’s provide an incredibly valuable service, even they can be wrong. If you are building an unusual typology or intend on building a product that is new for the area, then pre-selling will enable to you to test the price point of your product. This will underline revenue assumptions in your project feasibility and allow you to move forward with your build with confidence.

Developing a Sales Strategy

There is no one size fits all approach when it comes to developing a sales strategy. For this reason, instead of detailing an effective sales strategy we have posed some questions which we encourage all our clients to consider before launching their sales campaign.

A good sales agent will help develop a comprehensive sales strategy, and thus we suggest obtaining multiple proposals from various agencies (similar to a tender process) before committing to any one agent.

• Who is the best sales agent to represent you – is there a particular person or agency who would be best suited to sell your product?
• What is the best fee proposal to incentivise your sales agent?
• When is the best time to commence marketing?
• Are you going to pre-sell off plan or sell closer to completion?
• How much stock do you want to release and when? Are you looking to sell 100% of your product before commencing construction or simply sell as many as you need to unlock funding.
• Will one typology be harder or easier to sell compared to another?
• Will selling one product first create a price floor or ceiling for unsold stock?
• How are you going to market your product i.e. what sales channels are you going to use?

Don’t get caught out

Undertaking a development without an exit strategy in place not only undermines your ability to obtain funding but can severely impact the viability of your project.

Pre-sales protect your downside; however, it can come at a cost. Deciding to sell on completion is still a viable strategy, so long as you clearly demonstrate how you will execute this and its rationale.

Being fully drawn on a construction loan facility with no exit in place will result in you incurring unnecessary holding costs which can quickly erode a project’s profit.

Be prepared on how to create and exit strategy; talk to ASAP Finance about funding your next project.

NZ’s largest financial institutions including the RBNZ, Treasury and most major trading banks provide forward guidance on NZ house prices as well as wider-ranging macro forecasts for the housing market. While such predictions make for good reading, they are of limited use when making investment decisions. This is because macro forecasts typically fall into one of two categories; unhelpful consensus forecasts that provide little to no competitive advantage, or non-consensus forecasts that are rarely correct.

One only needs to look back at predictions for the housing market in 2020 when covid-19 first emerged. In May 2020, the RBNZ forecasted a 9% decline in NZ house prices, however, by the end of 2020, REINZ was reporting a +17.3% increase in house prices. This is a 26% margin of error from an institution whose primary role is to maintain the stability of New Zealand’s monetary and financial system. In hindsight, one of the key reasons the RBNZ was so wrong was because unemployment levels never reached anything close to what was forecast – they also underestimated the extent to which low-interest rates would buoy the market.

Financial models are only as good as the assumptions made, and in the macro-economic environment, many assumptions need to be made. For this reason, we are always hesitant to make macro forecasts for the housing market. That said, a broad understanding of macro-economic factors can play a critical role in property – particularly when it comes to managing risk. Below we look at credit availability and its impact on the development funding market.

Credit Availability: Sector Wide Credit Crunch

Credit availability describes the amount of funding that is available to the market. Most of the credit is provided via the major trading banks that facilitate investment in property (or other sectors) via investment loans. When banks tighten their lending criteria, funding becomes more difficult to obtain which in turn slows down investment in the sector.

Of late, there has been a significant tightening in lending criteria across all major banks. LVR restrictions, new responsible lending codes, and stricter servicing criteria are recent examples of banks making it more difficult to obtain funding. These changes predominantly impact investors and owner-occupiers who are looking to purchase property. However, we are now starting to witness a flow-on effect for property developers.

Almost all main banks require a project to have 100% presale cover prior to a development facility becoming available for drawdown. However, investors and first home buyers are finding it increasingly difficult to obtain finance on ‘off the plan’ purchases. This is creating an extremely challenging environment for developers who need to satisfy minimum presale requirements before they can draw from a construction facility.

In parallel, there is a general tightening in the development sector as banks take a cautious approach to supply chain issues and material shortages prevalent in the sector. Most banks are requiring increased contingencies in project budgets, higher levels of equity contribution, and key sponsors to have comprehensive development experience before a development facility is even considered.

Non-banks have been a primary beneficiary of banks restricting lending to the construction sector and developers are increasingly looking at alternate funding solutions that will enable them to move forward with their projects. In this regard, non-banks have greater flexibility with their funding lines and can often fund projects without presales, QS reports, and fixed-price contracts (read more about the notable ).

However, over the past few months, it has become apparent that even non-banks are struggling to keep up with the substantial increase in demand.

Having deployed all available funds, many non-banks are now at capacity and unable to onboard new clients or process new loans. In this context, even non-banks are starting to cherry-pick which transactions they fund with the lower risk transactions normally the first to be funded alongside existing client relationships.

To make matters worse, the churn rate (or the rate at which capital is recycled back into the market) is decreasing as delays to construction programmes push out expected repayment dates for projects across the country. Material shortages, inability to procure labour, and delays with council sign-offs and titles are all contributing factors to the current credit crunch.

Most lenders can attest to the increasing number of consented shovel-ready projects that are unable to get out of the ground for lack of funding. We have in previous blogs mentioned that it is prudent for developers to engage with lenders well in advance of funding being required; however, in current market conditions, it is absolutely imperative to do so. Relationships along with past performance will also be key, and developers who have taken the time to build strong relationships with their lenders will be in an advantageous position.

Future funding availability and risk mitigation

Looking ahead, we expect funding conditions to moderate in the medium term. As current projects are eventually completed, new funds will be deployed to the market. In the meantime, developers may have to consider selling down or holding off on starting their projects. To avoid being caught out:

1. Don’t take on too much debt, highly leveraged transactions will become difficult to fund as lenders cherry-pick the best transactions.
2. Take proactive measures to de-risk your project such as obtaining 50% presales cover (even if not required by your lender).
3. Allow for additional project contingencies, more so than you may have in the past.
4. Engage with your consultants, builder, and funder as early as possible. Expect delays in turnaround time and build this into your development programme.
5. In light of supply chain constraints, discuss alternate products and building methodologies with your architect and builder

Consult with ASAP Finance today for finance solutions

As a market-leading property finance company in New Zealand, ASAP Finance can offer the residential, commercial, or development finance solutions your need to get your development off the ground. Get in touch with our knowledgeable team today for more information.

Stay tuned for our next blog where we take a high-level review of how movements in property prices can impact various sectors within the residential property market.

As a builder or developer, you will know that working in construction means being vulnerable to all kinds of risks, many of which can result in compensation claims or financial loss. The inherently unpredictable and dangerous nature of the work means that you, your employees, sub-contractors, and members of the public are all vulnerable to physical accidents as well as property damage.

Insurance is an effective mechanism for transferring the risk (and associated financial loss) should something go wrong. In return for accepting this risk, you pay a premium to your insurer. However, not all policies are the same.

As a developer or builder, it is essential to know what insurance policies provide the best protection to your project. Furthermore, all lenders will require you to have appropriate insunraac cover before putting in place a development finance solution. In this blog, we explore some critical construction insurance policies and why they are important.

Public Liability Insurance

Public liability insurance is a policy that covers compensation claims arising from personal injury or accidental damage or loss to someone else’s property. Most construction work takes place on a third-party property, so it is no surprise that contractors have a high level of exposure to public liability risk.

The three main levels of public liability cover are $5m, $10m, and $20m, with the higher levels of cover attracting the higher premiums—noting that cover in place should be reflective of the nature and scale of the contracts being entered. While specific insurance policies vary between providers, most include cover for legal defence costs in addition to damages or compensations awarded by the court.

Public liability insurance does not cover damages relating to the “contract works”—when a builder enters into a construction contract, it is the builder’s responsibility to complete the work in accordance with the contract. Therefore, any damage that the builder causes is their responsibility to resolve, until such time as the contract is complete. In other words, because there is no loss to a third party, the builder will not be able to file a public liability claim but may be able to claim under a contract works policy if the damage is accidental.

Lastly, liability resulting from faulty workmanship is generally excluded from public liability claims. As a result, when damage does occur, a common issue is ascertaining whether the damage is the result of an accident or faulty workmanship. Some providers offer cover for a contractor’s liability resulting from faulty workmanship as a policy add-on (in return for an increased premium); this is something that you should discuss with your contractor.

Why is Public Liability Insurance important?

While public liability insurance is not mandatory by law, most construction contracts will require the builder and sub-contractors to have public liability insurance. Similarly, lenders will require public liability insurance to be in place prior to allowing funds to be drawn down from a construction facility.

Take an example where a contractor is doing earthworks and accidentally damages an underground power cable, or a scenario where contaminants are accidentally discharged into a neighbour’s stormwater line. The costs to remediate such damage has the potential to be financially crippling for the contractor. And as a developer, you need to know that your contractor has the financial capacity to successfully deliver your project.

Why is Public Liability Insurance important?

While public liability insurance is not mandatory by law, most construction contracts will require the builder and sub-contractors to have public liability insurance. Similarly, lenders will require public liability insurance to be in place prior to allowing funds to be drawn down from a construction facility.

Take an example where a contractor is doing earthworks and accidentally damages an underground power cable, or a scenario where contaminants are accidentally discharged into a neighbour’s stormwater line. The costs to remediate such damage has the potential to be financially crippling for the contractor. And as a developer, you need to know that your contractor has the financial capacity to successfully deliver your project.

Contract Works Insurance

Contract works insurance, also known as “builder’s risk insurance”, is an insurance policy that provides cover for sudden and accidental losses to the contract works. Policies can include both new builds and renovations of existing structures and will generally cover damage resulting from fire, theft, vandalism, construction collapse, some natural disasters, and other accidental damage to the contract works.

Almost all construction contracts will require contract works insurance to be put in place before works can commence. You can also be certain that your lender will require contract works insurance to be in place (and in an acceptable form) prior to drawing down from any construction finance loan facility.

Key things to consider when implementing a contract works policy

When putting in place contract works insurance, there are a few key things to consider:

Insured sum: The insured sum is the maximum amount the insurer will pay you (less any excess payable) in the event of a total loss. For a partial loss, the insurer will pay a fair proportion of the insured sum. For this reason, it is extremely important that the insured sum is sufficient to cover the cost of replacing or remediating the damaged property.

For example, if the contract value to build a house is NZD$1,000,000, then you would expect the insured sum to be no less than this amount. You should also consider what additional allowances need to be made for demolition, professional fees, and construction costs escalation when considering the insured sum. Keep in mind that for commercial contracts, the insured sum should always be plus GST.

Should you under-insure your project, then any funds paid on a successful claim will not be sufficient to remediate the property in full. This will require you to bridge any shortfall in funding, putting the entire project at risk.

Cover period: Your policy should be in place for however long it takes to complete the “contract works”. In other words, the period of cover should match the construction period in your development programme. Furthermore, irrespective of the expiry date on your policy, contract works cover typically ceases upon the earlier of the following happenings:

• Practical completion
• When someone starts using the building (such as an owner or tenant)
• When 95% of the budget is spent (for spec builds)
• The end date on the policy

To clarify, practical completion can occur weeks before a code of compliance certificate is issued by a relevant territorial authority, during which your property may not be insured. It is essential that you engage with your insurer to understand when your policy expires and to have a general fire and risk policy arranged for when your contract works insurance expires. After all, any loan facility provided to you by your lender will require your property to be insured at all times; failure to arrange the proper insurance may result in a “technical default.” To avoid this, insurers provide optional “completion cover” add-ons, which cover you for a specified period after the construction period or contract period is over.

Interested Parties: An interested party is someone that has a financial interest in your property. For contact works, this will usually be your lender; after all, it is likely their funds are being used to complete the development. Most lenders will require their interest noted on the policy; if so, advise your broker before putting the policy in place, as they will need to update the certificate of currency.

Exclusions: Contract works insurance covers costs arising from all kinds of accidental damages to the contract works. However, there are certain kinds of damages that are typically excluded. Below we explore some of these in more detail.

• Faulty workmanship – contract work policies specifically exclude damage caused by faulty workmanship.
• Consequential loss – consequential loss is a term to describe ‘indirect’ financial loss caused by damage to a business (or property). This may include loss of profits and/or increased costs, additional legal and professional fees, additional borrowing costs, loss of sales revenues (from the selling of a property below market value), and more. Consequential losses can be covered however it is a standalone insurance policy: “Liability Consequential Loss” insurance.
• Natural Hazards – it is not a given that your contract works policy will cover you for natural hazards. Some insurers offer this as an optional add-on to your contract works policy.
• Existing structures – most contract works policies will only cover the works being built i.e., relating to the contract.
• Third-party damages or loss – this is covered by public liability insurance
• Tools and equipment on site
• Employee theft
• Acts of war

What gets excluded and what gets covered can vary from policy to policy, and it is for builders and owners to figure out which policy works best for their requirements.

Statutory Liability Insurance

Statutory liability insurance protects businesses from any fines and penalties resulting from unintentional breaches of New Zealand laws. This can include breaches of the Resource Management Act, the Building Act, the Health and Safety at Work Act, and other relevant acts. As with public liability, cover typically includes associated legal defence costs relating to prosecution under New Zealand’s legislation.

Examples of statutory liability claims include failure to comply with a resource consent condition, pollution of land or waterways with runoff from the site and building without correct consents.

Set Yourself Up for Success: Consult with ASAP Finance Today

Knowing what your construction insurance policies cover (and what they don’t) is a critical part of reducing project risk. Should you, your contractors, or consultants not have adequate cover in place, you may be vulnerable to significant loss; such losses could undermine the success of your project as well as your business’s ability to operate as a going concern.

As is the case with most things, it pays to research options in the market and to seek professional advice. Engage with specialist financial advisors who have experience in construction insurance and access to a wide pool of products available in the market. Consult with ASAP Finance today!

COVID-19 triggered a global economic recession in 2020, and central banks across the globe reacted by slashing interest rates – a standard practice to prop up liquidity and stimulate the economy.

More than a year later, regulators are still holding off on hiking the rates back up due to the continued effects of the pandemic. But New Zealand is about to buck that trend in 2021 and become the first advanced economy to raise interest rates. The move was widely expected in August but has since been postponed due to the country’s first COVID outbreak in six months. This outbreak is only a temporary setback – the smart money remains firmly on the RBNZ to hike the rates later in 2021, and it would be hard to deny that the New Zealand property market has played a major role in that.

Here, we look at how rising interest rates will impact the real estate market and residential development finance in 2021.

What happened to the NZ real estate market in 2020-21?

The New Zealand housing market is facing an affordability crisis in 2021. This did not happen overnight – it was years in the making. In the decade after the last global recession in 2008-09, the New Zealand economy had bounced back strongly.

Rising income levels, strong immigration, overseas investment, and lower interest rates have combined to drive demand in housing to historic highs. Even when the economic recovery started losing steam by 2018-19, the lowering of interest rates and traditionally low supply of properties ensured the boom in the New Zealand property continued.

When COVID struck in 2020, the Reserve Bank of New Zealand (RBNZ) responded by slashing the interest rate (OCR) by 0.75%. That move brought the OCR to 0.25%, the lowest recorded in recent memory. Even as the wider economy stalled under the strain of COVID, property prices showed no sign of slowing down.

The RBNZ has tried to use other measures like higher Loan-to-Value Ratio (LVR) restrictions to rein in the housing prices, with limited success. In Q1-Q2 2021, it had soared to a 31% increase. A hike in interest rates now seems to be the only readily available tool for address the current housing crisis, noting the RBNZ has called the current rates “unsustainable.”

What happens to property markets during an interest rate hike?

There are numerous factors at play in a dynamic free market, and a rise in interest rates rise can play out in many ways. But in a “healthy” market, the impact of a hike on the real estate business is quite well established.

Interest rates determine the cost of debt. They force banks and other lenders to charge a higher interest rate on top of the principal amount in loans, including home loans. Simply put, when the interest rate is low, it is good news for property buyers – credit is cheaper and mortgage rates are decreased. A hike in the rates has the opposite effect – as mortgage rates increase, houses become less affordable, and the cost of servicing debt rises. Even an increase of 1% interest rate can have a significant impact on mortgage costs. You can expect monthly payments to increase by an average of 10-15%.

For example, Auckland’s median house price is $1,175,000. Assuming an 80% LVR (or 20% deposit), the average Aucklander will have a loan of $940,000.
If Jim has a $940,000 mortgage on a 30-year term with a 3% fixed interest rate, he will pay $3,963 in interest each month. Increase the interest rate to 4% and that payment increases by 13% to $4,488.

Rising interest rates do not just affect buyers, those looking to sell property also face challenges when mortgage rates increase. Selling a house at a higher price becomes harder, as there are fewer buyers who can afford it at the prevailing mortgage rates. For investors, not all will be affected the same; in the face of higher debt servicing costs, highly leveraged investors will likely need to sell properties to reduce the debt exposure. Others, who are well capitalised, may benefit from an increased demand for rentals properties (and subsequent increase in rents) as demand for new homes falls.

When interest rates are increased, real estate prices do usually decline (noting that these price adjustments can take some time to be realised by the market). New Zealand banks and lenders have already started adjusting mortgage rates in anticipation of expected interest rate hikes later this year.

Is a rise in interest rates bad for the real estate market?

In the current context of the New Zealand property markets, an interest rate hike is likely to be a welcome move. While lower rates are ideal for the growth of the market, in excess, it can lead to overheating. Keep in mind that interest rate rises generally occur in response to strong economic activity. The labor market is strong with low unemployment and a recent revival of wage growth. In this context, an interest hike is not likely to have any serious adverse effects on New Zealand property prices and should be well accommodated by the market.

Furthermore, New Zealand has experienced one of the lowest cumulative restrictions in the OECD, even accounting for the recent outbreak. This has insulated our economy from severe shocks, with the country faring better than many of its peers, with positive growth – in contrast, across the Tasman, Australia does not expect growth to resume until 2024.

This is not to say that the industry does not have its headwinds. Higher rates, tighter credit conditions, changes to tax policy, and increased supply will all have their part to play over the next 12 months. At ASAP, we remain optimistic and continue to seek new funding opportunities for 2021 and beyond.

Consult an expert at ASAP finance before making your next move in the New Zealand property market

We are a market-leading property finance company in New Zealand, offering bespoke residential and commercial property finance nation-wide. Talk to one of our expert team members today for expert advice on the NZ property market.

New Zealand Finance Minister Grant Robertson now requires the Reserve Bank (RBNZ) to consider the impact its monetary policy decisions have on house prices, following a revision to RBNZ’s remit. This has created some significant ripples in the property finance sector.

While the Government’s Monetary Policy Committee’s main objectives remain unchanged (targeting inflation and employment), the revised remit will increase focus and understanding on the Banks OCR decisions and the impact on house price sustainability.

Rising House Prices Need Attention

The rationale is simple—record-breaking low interest rates have bolstered demand for housing and credit, pushing house prices to astronomical levels. This change has called into question the Government’s stated commitment to improving housing affordability for all New Zealanders.
The revised remit stipulates the Government’s policy is to “support more sustainable house prices, including dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.”
Robertson said the Committee could decide how its decisions take account of housing consequences, but it will need to explain how it has sought to assess their impacts regularly. The new remit takes effect from 1 March.

What does this mean for Monetary Policy?

The Monetary Policy Committee has stressed, “prolonged monetary stimulus” (low-interest rates) is necessary to protect employment and promote economic expansion following the economic shock caused by COVID-19. It said it would maintain the current policy until it was confident inflation is “sustained” at 2% per year, and employment is “at or above” its maximum sustainable level.

In this regard, we do not expect the revised remit to impact OCR decisions. In fact, the RBNZ openly opposed the New Zealand’s Governments initial proposal late last year to require it to consider house prices when setting monetary policy, arguing it would instead be made to view house prices through the way it regulates banks (through macro-prudential tools such as ‘loan-to-value ratios’ and ‘debt-to-income ratios’).

Despite such opposition, the new directive has been issued to the RBNZ (under section 68B of the Reserve Bank Act). In a statement from RBNZ Governor Adrian Orr, the Governor reinforced his previous comments, saying that the RBNZ’s actions are among “many” that influence house prices.

Restricted bank lending

However, finance minister Grant Robertson asked the RBNZ to provide advice on restricting borrowers’ debt-to-income ratios and interest-only mortgages.

“I want to understand the extent to which interest-only mortgages (particularly to speculators) pose risks to financial stability and whether restrictions should apply,” he said. He added that jurisdictions such as Australia have in the past applied restrictions on interest-only mortgages due to financial stability risks.

He said he had already made clear in principle that he would want these to apply only to investors, thereby impacting those wishing to attain investor loans. “It’s important that any potential restrictions do not disproportionately affect first-home buyers and low-income borrowers,” said the finance minister.

Orr had earlier told the media that he did not share Robertson’s view. Orr said: “It is incredibly difficult to segment any market and any individual with macro-prudential tools. The phrase “macro” means it’s the same tool for all. So, pretending we could fine-tune for a particular set or groups comes with great challenge and implications.”

The RBNZ has already applied more onerous loan-to-value ratio (LVR) restrictions on residential property investors than it has on owner-occupiers, requiring them to have larger deposits when taking out mortgages.

Should the Government agree with the RBNZ’s recommendations, it would not be surprising to see debt-to-income ratios and restrictions on interest-only loans implemented in 2021. While such measures may take some heat out of the market, the single most crucial factor driving current market conditions remains interest rates.

Navigate the property finance world with an expert lending manager from ASAP Finance.

Want to know more about the financial world or obtain a construction loan of your own? Talk to one of our experienced, business-minded lending managers today; we can help you get your project off the ground.

As has long been forecasted, the Reserve Bank of New Zealand (RBNZ) has now moved to reinstate higher Loan to Value ratios(LVRs). There were no restrictions last year, meaning buyers could potentially purchase a home while putting down a smaller down payment. However, the property market has since boomed, prompting the RBNZ to consult interested parties on whether to reinstate the LVRs.

The government seems to have been the only party surprised with the housing market’s vigorous rebound over the past year. Now, the government is predictably encouraging the RBNZ to try and slow down the rally in property prices. In this blog post, we’ll review why the LVR restrictions have been reinstated, what the predicted results are, and how this will impact commercial and residential development finance.

Why reinstate Loan-to-Value Ratio restrictions?

Prompted by the government and the expanding house price bubble, this move to reinstate LVR restrictions is expected to slow the surge in house prices, but not until the second half of 2021. The RBNZ has announced that it will be cracking down on bank lending to residential property investors and will reinstate the tougher LVR restrictions that were in place last year. From May 1, at least 95% of new bank lending to residential property investors will have to go to borrowers with deposits of at least 40%. Essentially, the RBNZ is targeting residential property investors with new, higher LVR restrictions. Generally, most commercial investors will once again need 40% deposits, while most owner-occupiers will need 20% deposits.

As an interim measure, from March 1 to April 30, this deposit requirement will be set at 30%. The RBNZ says it is taking a “staged approach” to enable banks to manage their pipelines of loan applications that have been approved, but not yet settled. However, it expects lenders (both banks and non-bank lenders ) to respect the 40% rule “immediately with all new loan approvals”.

As for owner-occupiers, from March 1, at least 80% of new bank lending will need to go to borrowers with deposits of at least 20% – the level LVRs were at before removal last year.

What does this mean for investors and owner-occupiers?

In a press release from the NZ Property Investors Federation executive officer Sharon Culwick was quoted, claiming that the move would inevitably slow down the housing market, making it harder for first home buyers and investors to enter the market. “’The larger deposits required may not stop those people who are looking for an investment option, which is an alternative to the extremely low term deposit rates offered by the banks,’ said Culwick.”

She noted that during the last year, there had been a significant increase of new investors entering the market. And that those investors had purchased on the proviso that house prices would continue to rise at the same levels recently seen.

“Capital gains, however, should only be considered a bonus and not be relied upon,” she said, adding: “In any case, these Reserve Bank restrictions may not make a significant difference to some property investors who have already been hindered by the banks’ internal Debt-To-Income and serviceability rules over the last two years. These restrictions are an internal process that safeguards the financial stability of banks.”

In the words of RBNZ…

RBNZ Deputy Governor Geoff Bascand says LVR restrictions were removed last year “to ensure they didn’t interfere with COVID-19 policy responses aimed at promoting cash flow and confidence.

“Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace,” Bascand said. “We are now concerned about the risk a sharp correction in the housing market poses for financial stability. …A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt.”

The Reserve Bank has warned that the overheated housing market is at growing risk of a correction necessitating the changes. However, The NZPIF does not believe the new regulations will have any impact on the housing crisis, which is largely driven by lack of supply. “If anything, housing stock for rent will be gradually reduced as property investors are prevented from entering the market. This will put more pressure on those groups who are already struggling to find a place to live,” said Culwick.

Therefore, property investors and owner-occupiers alike need to have the right tools and expertise at hand to navigate these reinstated conditions. For investors in particular, the expert team at ASAP Finance can help.

Discuss your investment plans with the expert team at ASAP Finance.

Beyond the see-saw of LVR restrictions imposed by the RBNZ, supply demand considerations remain a key focus at ASAP Finance. We continue to work hard to ensure adequate funding is made available to our clients for residential developments. It is here that we know we can make the most difference, by doing our part to ensure the successful delivery of new housing stock to the New Zealand property market.

COVID-19 has caused widespread disruption across global markets resulting in job losses and economic hardship. In response, countries across the globe have been implementing economic policy to soften the blow of the current crisis. In New Zealand, the Reserve Bank’s response was swift, immediately lowering the OCR from 1% to 0.25%, and announcing (what would become) a NZ$100B bond buying programme. These measures were considered necessary to lower borrowing costs and to achieve the banks inflation and employment targets.

Acknowledging that further monetary stimulus would be required, the RBNZ asked trading banks to prepare for alternate monetary policy including negative interest rates and a funding-for-lending programme (FLP). Trading banks were advised to prepare for these policies before year end with the Reserve Bank recently announcing that the FLP would commence in December 2020. Property finance companies geared up for change. Investors wait for what the end of the year would bring.

Below we explore these new policies and how they may impact New Zealand households and businesses – the future on which New Zealand’s economy now relies upon.

How do interest rates impact economic activity?

New Zealand businesses and consumers are the lifeblood of our economy – they are what will keep the country’s economy turning. However increased uncertainty may lead many people to sit on the side-lines, deferring consumption and investment decisions until a more certain future is evident. This decline in economic activity threatens jobs and creates deflationary pressures on pricing. To mitigate these risks, lower retail interest rates are needed to stimulate economic activity – where lower rates would reduce funding costs and improve cashflow for households and businesses.

The Reserve Bank cannot directly control retail interest rates – they only influence wholesale rates. Trading banks hold deposit accounts at the Reserve Bank, where the Official Cash Rate (OCR) is the interest rate the Reserve Bank pays trading banks on their deposits. When the OCR is moved down, it reduces a banks cost of funds. The flow on effect to retail interest rates is simply a result of open market competition amongst the various trading banks.

With the OCR at just 0.25%, the RBNZ has little room to lower it further – hence the need for the RBNZ to explore a negative OCR.

How would Negative Interest Rates work?

A negative OCR simply means that banks would be charged to hold cash on overnight deposit accounts. This would incentivise banks to lend or invest their funds in order to avoid paying a holding cost, providing stimulus to the economy. In this sense, a negative OCR influences economic activity with the same strength as a positive OCR.

For household and businesses, lending and deposit rates would decline but do not expect to see them go negative. Retail mortgage rates are set based on a margin, in accordance with funding requirements and broader risk assessments. This margin would be applied to lending to ensure that retail mortgage rates remain above zero. For deposit rates, they will get near to zero but there is a limit as to how low they can go – the closer to zero deposit rates get, the less incentive customers have to deposit funds with a bank. This is an important consideration as deposits are a critical source of funding for banks.

Will the RBNZ move into negative territory?

The New Zealand economy has been surprisingly resilient across key measures of employment, household spending, GDP, and asset prices. The housing sector in particular has performed exceedingly well, with the RBNZ now expecting house prices to increase by 10% for 2020. A complete reversal from the 10% decline predicted earlier this year. With this in mind, the likelihood of the Reserve Bank adopting negative rates is slim.

For now, its priority is on implementing its funding for lending programme (FLP) which will see the Reserve Bank offer low-cost, secured, long-term funding for banks to on-lend to retail customers. Doing so will lower retail interest rates (in a similar manner to a negative OCR) without putting bank deposit funding at risk. The programme will be rolled out in December 2020 and the Reserve Bank expects the size of the programme to reach NZ$28B.

What does this mean for you?

We are entering unchartered territory so it would be amiss to state that anyone knows how this will play out. One of the reasons the Reserve Bank is looking to deploy unconventional monetary policy is because risk factors that threaten to undermine its employment and inflation targets remain present. The economic downturn has not been felt equally by all New Zealand businesses and future growth remains contingent on further stimulus. Current policies continue to point to lower interest rates which should put a floor under asset prices, particularly within housing (with upside potential). Substantial demand remains across both the investor and owner-occupiers’ sectors, and we expect the low interest rate environment to compress yields across the board.

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Here at ASAP, we believe in collaborating with our clients. We offer a variety of development finance solutions including joint venture arrangements and underwrites. Talk to one of our expert lending managers today.