Funding your project may require a specialist self-build mortgage…
There are two significant costs when building your own home: the building plot and the build itself. There are also a few additional costs that you’ll need to factor in — see the box below.
Funding your build
You’ll need access to money to buy a building plot, to pay for professional services such as architectural designers’ fees and any site surveys required, and to fund the build itself. How you find this money will, of course, depend on your financial situation. It may come from your savings, equity in your existing home, a self-build mortgage or, most likely, a combination of all three.
Surprisingly few high street banks provide formal facilities for self-build finance, so you’ll probably need to approach a specialist self-build mortgage provider. A self-build mortgage is tailored towards the way you pay for a self-build project — with money released in several stages, rather than all at once (as it would be if you were buying a house). Finance will be released at key stages as the build progresses, for example when the foundations are laid or when the building is made weathertight.
There are two main types of stage release mortgage. The first is an arrears stage payment mortgage, which see funds released as work is completed. The second is an advance stage payment mortgage, which pays out before each designated stage of the build begins. The latter has obvious advantages in terms of assisting cash flow and is generally better suited to those who do not have large pots of savings with which to fund their build as it progresses.
Some, but not all, self-build lenders are willing to lend on plot purchases too. Rates of interest for self-build mortgages are typically higher than those that are currently available for a standard house purchase or remortgage, and the arrangement fees vary significantly from lender to lender, so be sure to shop around. Once the property is habitable, some lenders allow the borrower to switch to a lower rate of interest.
The amount you can borrow will depend on similar factors to those that would govern your limit on a standard house mortgage; in most cases these will include an affordability assessment, income multipliers and LTV (loan to value ratio — a measure of lending risk). Lending policies change regularly, but lenders may, for example, offer to provide funding for up to 85% of the value of the building project. In order to progress your application you’ll likely need to provide plans and a breakdown of the potential build cost.