Self build mortgages explained

WGet the right finance in place to support your bespoke home goals with our quick-fire guide hile some are lucky enough to be able to fund a project without borrowing, for most of us, a suitable mortgage is a must. But the high street banks don’t tend to be set up for the unique requirements of a live build that’s changing in value as it gets constructed. Thankfully, specific self build mortgages are available. But how can you access them and improve your chances of being accepted?

What are self build mortgages?

When you start exploring the market, you’ll quickly realise there are two basic types of mortgage for self builders; those that lend you money in arrears (ie after works have progressed on site); and those that give you it upfront and ahead of the works being started.

Both lend in stages (typically four or five) as the project unfolds. They are typically capped at a maximum contribution of around 75%-95% of the predicted end value of the project, otherwise known as the loan-to-value (LTV) ratio.

Arrears-based mortgages

With an arrears mortgage, when you reach one of your predetermined key stages for a payment release (such as the completion of the roof structure and covering), you ask your lender to access the respective tranche of funds.

They will then send out a surveyor, who determines how much additional value there now is on site, against which the lender can make suitable payment. If the difference between the new valuation and the last one is £40,000, then at an LTV of 80%, your stage payment release could be as much as £32,000.

In general, arrears mortgages offer a maximum LTV of 85%. They are straightforward from the lender’s perspective, so there are a lot of options available. If you require it, funds for a land purchase can be provided in advance. Thereafter, the cash flow profile best suits those with significant savings.

Advance payment mortgages

With the advance stage payment mortgage, which was invented by Buildstore (the UK’S leading self build mortgage broker), your cash flow needs are assessed in detail before the project even starts. This way, the right amount of money can be made available to meet your payment commitments as the construction work progresses.

So, the project is properly costed, the release stages calculated, your borrowing facility assessed against the cash you already have available and a detailed cash flow statement is prepared. Why’s this important? Well, payments to suppliers and contractors may be due ahead of the incremental increases in building value. If your agreement pays out in arrears, you’d need to foot the bill out of your own cash reserves and wait for the lender to replenish your funds.

The advance stage payment route removes this issue for the self builder – instead, the lender takes on a funding gap (the level of exposure it temporarily assumes until the project is complete). This gap is secured by an insurance bond, so you’ll be a one-off indemnity fee for this kind of mortgage.

Proliferation of cost-based mortgages

Buildstore is encouraging more and more lenders to release stage payments based on your actual build costs, rather than survey valuations, for both arrears and advance mortgages. The big benefit of this approach is that, even if there’s been no uplift in value from the work, you have certainty that you will still get the cash you need – with no need to wait around for a surveyor to sign off release of funds.