Rapidly Rising Construction Costs Squeeze Home Builders
The rapid growth of construction prices has created a situation where banks see increased risks from borrowers who want to apply for a home loan for a single-family house being built for their own use.
Put simply, this means that a person who wants to take out a loan for building a house, for example, must be prepared for the fact that construction costs may increase significantly compared to the time the loan agreement was signed, which is why the bank may want additional own financing during construction or demand additional collateral. This is mainly for the simple reason that during construction it becomes clear that the expected post-completion market value of the building is lower than the total construction costs.
In situations where people don't have the means to meet the additional requirements set by the bank, there is a risk that construction work may be delayed or a situation arises where it makes more sense to sell the house being built. An alternative is to increase the loan amount relative to the collateral value, but this is an additional risk for the bank and more of an exception than a rule. Construction delays caused by financial difficulties usually result in an increase in the number of expert assessments related to the property being built for the client, which in turn represents an additional expense.
For this reason, people should pay even more attention to their financial capacity before signing a loan agreement in the current situation, taking into account possible risks that may arise in the future. Banks see the situation the same way today, as they already investigate the client's financial capacity before the loan application, as well as what possible risks may arise regarding additional collateral and other problems that may occur during construction.
Construction price growth will likely extend today's construction process, but with thoughtful action it is possible to avoid unpleasant surprises.
