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…
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.
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.”