self-build mort­gages ex­plained

Work­ing out where the funds for your new build will come from should be top of your ‘to do’ list. This may ne­ces­si­tate a self­build mort­gage, which we ex­plain here…

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O ne of the first de­ci­sions you’ll have to make when plan­ning a self-build is how you will fi­nance the project. This will de­ter­mine how much bud­get you will have avail­able and im­pact upon ev­ery ma­jor de­ci­sion you make dur­ing the process — per­haps from the lo­ca­tion of your plot through to the qual­ity of the fin­ish. Sim­ply put, es­tab­lish­ing your fi­nance op­tion should be your first con­cern. A re­cent study of over 10,000 self-builds in the UK* found that the me­dian build and plot cost to­talled £460,000, while one in five self-builders used a spe­cial­ist self-build mort­gage. This is, aside from re­ly­ing en­tirely on sav­ings, the most com­mon route to fi­nanc­ing a self­build. Se­cur­ing a mort­gage is not as easy as con­tact­ing your lo­cal high street lender, how­ever, and there are dif­fer­ent types of lend­ing pat­terns that you will need to un­der­stand be­fore you can make your de­ci­sion.

What is a Self- build Mort­gage?

Self-build mort­gages work dif­fer­ently to stan­dard mort­gages on ‘ built’ houses. It’s easy to un­der­stand why. A lender is look­ing to en­sure re­turn and min­imise risk and, let’s face it, a self-built house can ap­pear a riskier propo­si­tion than an es­tab­lished prop­erty. It’s for this rea­son that you won’t find many ma­jor lenders of­fer­ing self-build mort­gages and why it may pay to ap­proach spe­cial­ist mort­gage bro­kers. Self-build mort­gages typ­i­cally re­lease funds in stages ( see right), ei­ther in ar­rears or in ad­vance. “With an ar­rears stage pay­ment mort­gage, funds are re­leased to buy the plot, and then the money for the build is re­leased as each stage is com­plete, and a val­u­a­tion has taken place. Stan­dard ar­rears stage pay­ment mort­gages will typ­i­cally let you bor­row up to 75% of your plot and build costs, while with Build­store’s ex­clu­sive prod­ucts you can bor­row up to 85%,” ex­plains Build­store’s Rachel Pyne. “The Ac­cel­er­a­tor Stage Pay­ment Mort­gage (cre­ated by and ex­clu­sive to Build­store) re­leases funds at the be­gin­ning, rather than the end of each build stage. This means you’ll have the cash you need to fund the early stages of your build — in­clud­ing buy­ing the plot. It’s pos­si­ble to bor­row up to 95% of your plot and build costs with the Ac­cel­er­a­tor mort­gage. “If you’ve cho­sen an off­site con­struc­tion system like tim­ber frame or SIPS, where you may be re­quired to pay for as much as 90% of your system be­fore it leaves the fac­tory, Ac­cel­er­a­tor means you’ll have the cash to meet your sup­plier’s pay­ment terms. Pos­i­tive cash­flow is the lifeblood of any project,” says Rachel Pyne.

What Should I Con­sider Be­fore Ap­ply­ing?

Mary Ri­ley, di­rec­tor of Mary Ri­ley Cus­tom Build Fund­ing, sug­gests there are three key things that you need to have de­cided be­fore you ap­ply for a self-build mort­gage: where you are go­ing to live dur­ing the build, your con­struc­tion method and your build cost. “Where you in­tend to live while you build will have an im­pact on your af­ford­abil­ity to bor­row monies to build your dream home. For in­stance, the monthly rental pay­ments or mort­gage pay­ments will have an im­pact on your af­ford­abil­ity cal­cu­la­tion. Re­mem­ber too that some lend­ing in­stitu- tions will not lend on cer­tain types of con­struc­tion, so do en­sure you check with them and do not agree any pay­ment sched­ule with your builder or sup­pli­ers un­til you know how your lender will re­lease funds to you,” she says. “Some lenders re­quire that you must work to a fixed build cost bud­get; oth­ers may re­quest that a qual­i­fied quan­tity sur­veyor pro­vides the in­for­ma­tion on the build costs.”

How do I Ap­ply?

“It’s im­por­tant that your credit re­port is in good con­di­tion, and your in­come and out­go­ings shown on your bank state­ments are healthy, with no signs of over­spend­ing,” be­gins Rachel Pyne of Build­store. “The per­sonal and fi­nan­cial in­for­ma­tion re­quired is typ­i­cal of that of a stan­dard res­i­den­tial mort­gage, for ex­am­ple a form of ID, proof of ad­dress, bank state­ments and in­come doc­u­ments. In ad­di­tion to this, the lender will need a copy of the plans for your new

home, and build plan­ning cost break­down.” per­mis­sion An ini­tial val­u­a­tion will estab­lish the cur­rent and an­tic­i­pated end value of your project — and un­for­tu­nately, you will have to foot the bill for this. The whole process, which in­cludes an in­ves­ti­ga­tion of your fi­nances and sup­port­ing doc­u­ments, can take up to three months.

Re­ceiv­ing Funds

Be­fore lenders have ad­e­quate you will ex­pect re­ceive site you funds, in­sur- to ance and a 10-year struc­tural war­ranty pol­icy in place. You may also find that lenders will re­quire a re­ten­tion to be in place. This is most typ­i­cally seen on an ar­rears stage pay­ment mort­gage and could see up to 10% of the to­tal funds held back un­til you can pro­vide a com­ple­tion cer­tifi­cate.

Are There Al­ter­na­tives?

If you own your ex­ist­ing home or have enough eq­uity in it, you may be able to re­mort­gage or take out a bridg­ing loan to pay for your new plot, fund the build costs, or even both. You would then sell had and Pyne your com­pleted pay adds: old off “It’s the house im­por­tant the loan. once new Rachel you one to note ing loan that se­cured a reg­u­lated on bridg- your main res­i­dence has a max­i­mum term of 12 months. This means you must com­plete your new home and sell your old one in this time to re­pay the loan.”

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