Byggelån
A byggelån (construction loan) is a short-term loan that finances the construction of a building during the build period. The loan is not paid out as a single sum. It is drawn down in stages as the building progresses, and it converts to an ordinary mortgage or commercial loan once the building is complete and a ferdigattest (final completion certificate) or midlertidig brukstillatelse (temporary permission to occupy) is in place.
The security is what makes the construction loan special. At the start, only the plot exists, and the bank takes a charge over the plot. As the building goes up, the value of the security rises too, and the bank extends the charge to cover the building under construction. The mortgage deed is registered in Grunnboken before the first payment, so that the construction loan gains legal protection ahead of later encumbrances. Staged payments are made against documentation of work carried out: an invoice from the contractor, minutes from a site meeting, photographic records or an on-site inspection by the construction loan bank. The usual phases are groundworks, shell, weathertight building, fitted out and ferdigattest, with a payment percentage for each phase.
The interest rate on a construction loan is typically 0.5 to 2 percentage points above an ordinary mortgage. That is because the security is incomplete (a plot and a building under construction are harder to realise than a finished building) and because the technical building risks sit with the borrower. There are also construction loan fees and inspection fees for each payment phase. To limit the interest burden, interest is often capitalised on the construction loan itself as it accrues, so it is not paid monthly during construction but forms part of the total sum at conversion.
The construction loan is regulated as consumer credit where private individuals build their own home, and by bustadoppføringslova (the Norwegian Act on the construction of dwellings) where a developer builds to order for a consumer. Bustadoppføringslova section 47 limits the right to demand advance payment: the amount paid out may at no time exceed the value of work carried out and materials supplied on the property, and at least one tenth of the consideration must be held back until handover. The provision protects the consumer, because in practice payment follows the progress of the building. For commercial developers, the construction loan is a commercial loan without equivalent protection, but with equivalent structural requirements for staged payment.
Conversion takes place on ferdigattest or midlertidig brukstillatelse under the Norwegian Planning and Building Act section 21-10, or possibly a final inspection by the bank. The construction loan is then refinanced into a long-term mortgage or commercial loan with a lower rate and a longer term. The mortgage deed stays in Grunnboken and is used as security for the new loan, or it is replaced with a new mortgage deed for the correct amount if the creditor or the lending structure has changed.
There are several risks. Construction costs can run over budget (overruns are rarely covered by the construction loan facility and must be met from the borrower's own equity). Delays extend the construction loan period and therefore the interest cost. Insolvency of the design and build contractor can leave the borrower in a difficult position with a half-finished building. Bustadoppføringslova gives a consumer buyer certain rights against insolvency (the section on guarantees, and a claim to have the work completed by another contractor), but the process is still demanding.
For private individuals building a detached house on their own plot, a construction loan is the normal route to finance. For commercial developers, the construction loan is one of several forms of finance alongside equity, mezzanine debt and pre-sales. Homes sold in advance reduce the bank's risk and can give a lower rate on the construction loan.
In Placepoint you will find zoning provisions and the limits on development in the Property panel, useful for understanding what is permitted on a plot before the construction loan process starts.
How this looks in Placepoint
In Placepoint you will find this in Property panel:
From Placepoint's glossary: Byggelån
More information: Lovdata: Bustadoppføringslova section 47, Lovdata: Plan- og bygningsloven section 21-10, Forbrukerrådet: Construction loans and new builds
English: Construction loan.
Frequently asked questions
What is a byggelån?
A byggelån is a short-term loan that finances the construction of a building. The loan is paid out in stages as the building progresses and converts to an ordinary mortgage once a ferdigattest or midlertidig brukstillatelse is in place.
Why is a construction loan more expensive than an ordinary mortgage?
The rate is typically 0.5 to 2 percentage points above an ordinary mortgage, because the security is incomplete during the build period and the technical building risks sit with the borrower. There are also construction loan fees and inspection fees for each payment phase.
How is the construction loan paid out?
In stages, against documented progress of the building. Typical phases are groundworks, shell, weathertight building, fitted out and complete. The bank requires invoices, site meeting minutes or an on-site inspection before payment. Bustadoppføringslova section 47 limits the developer's right to demand payment beyond the value of what has actually been carried out.
When is the construction loan converted?
Conversion normally takes place on ferdigattest or midlertidig brukstillatelse under plan- og bygningsloven section 21-10. The construction loan is then refinanced into a long-term mortgage with a lower rate and a longer term.
What happens if the contractor becomes insolvent?
For consumers, bustadoppføringslova gives a right to a completion guarantee and certain rights on insolvency. In practice the process is demanding: a new contractor has to take over, and extra costs may have to be met from the borrower's own equity.