Central Office Instruction

amending General Orders (1993 edition)

Instruction No. 32

Date of Effect: 5 September 1994

PURCHASE LAND AND BUILD A HOUSE

Purpose

The purpose of this Instruction is to refine the policy on proposals to "purchase land and build" as amended by COI 28.

Background

Following the issue of COI 28 it has come to our attention that where borrowers are initially buying land with the intention of building, Westpac has a policy of applying housing rates of interest for the first five years only. If the client has not built a home within that period, the loan interest is raised to investment rates. We see this approach as a way of ensuring that our mutual clients comply with the dual purpose specified on the certificate of entitlement issued i.e. "to purchase a holding and build a dwelling-house on the holding". We have therefore decided to refine the policy enunciated in COI 28 and to define the term "reasonable time" for this category of assistance as five years.

Policy to be applied

In any case where the applicant intends to buy land initially with the intention of building a home within a reasonable time, a certificate of entitlement may be issued for the dual purpose, notwithstanding that under the initial funding arrangements the advance is used solely for the purchase of the land. In accordance with paragraph 18(2)(b) of the Act we need to be satisfied that the advance will enable the client to buy land and build a house. A reasonable time within which to satisfy this dual purpose is set at five years. If construction of the home has not been completed within five years, subsidy is to be cancelled on the basis that the applicant used the advance for a purpose other than that for which it was made [paragraph 26(1)(c) of the Act refers]. Recovery action is not to be taken in these cases. Upon cancellation of subsidy, the bank will discharge the subsidised loan with a fresh loan at the going investment rate of interest, or alternatively the applicant may refinance through another source. Either way, the subsidised advance will be terminated leaving the applicant the option to take up a further advance under the portability arrangements at some time in the future for a legitimate housing related purpose.

In these circumstance it is most important that clients are warned of the possible consequences in writing at the time the certificate is issued, particularly in view of the impact on both DSH and Westpac of the proposed uniform credit legislation, which will be the subject of a later COI. Please delete the note 4 reference on the reverse of the certificate in these cases until the form is reprinted.

An appropriate monitoring mechanism should be put in place to ensure that the five year time limit is complied with.

General Orders

Attached are amended pages 23-26 for the Entitlement General Orders. Please replace the existing version with the amended version. The amended GOs now read;

3.7.1 Purchase of Land

A subsidised loan is not available to purchase land solely. However, where a client genuinely intends to proceed with the building of a home within a reasonable time and construction is to be completed within five years of settlement, a Certificate of Entitlement should not be refused merely because the advance will be applied initially to the purchase of the land only. The decision should be based on consideration of both the intended purpose and the intention to occupy. [Please also see Entitlement GO 3.7.6.]

3.7.6.2 Time Limits. Whether the intention to use the house for the prescribed purpose will be met within a reasonable time is relevant to the genuineness of the intention. What is a reasonable time will vary having regard to the circumstances of each case, but where a certificate is issued to buy land and build a home and the funds are used for the purchase of land with the intention of building, it is a requirement that the home is completed within five years from settlement of the loan. Failure to complete construction of a house capable of being occupied within five years will result in cancellation of subsidy, discharge of the initial advance and substitution with a loan at investment rates of interest or alternative finance. Clients should be warned of these possible implications in such cases.

We also take this opportunity to insert a cross reference in Entitlement GO 3.7.9 to the corresponding instruction in Subsidy Procedural Matters GO 1.5.

Standard Letters

Standard letters will be appropriately amended.

Effect on previously issued COIs

This Instruction further refines the policy enunciated in COI 28.

DAVID MACKRELL

General Manager

2 September 1994