Financing your build
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 on the bottom right of this page.
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, who will be able to offer you a mortgage product 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: an arrears stage payment mortgage, which sees funds released as work is completed, and an advance stage payment mortgage, which pays out before each designated stage of the build begins. The latter has the obvious advantage of assisting cash flow and is generally better suited to those who do not have large pots of savings 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. The arrangement fees also 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, so be sure to look for that feature and factor it in to your decision.
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.
DON’T PAY WHEN YOU DON’T NEED TO Reclaiming VAT
One of the major benefits of building your own home is that you can reclaim VAT using HMRC’S VAT431NB form. This includes materials that are fixed into the house. The interpretation of this can be complex. For instance, you can reclaim VAT on timber flooring, but not carpet. You cannot reclaim VAT for design fees or services. You can only make one claim, so keep your VAT receipts safely in one place.
CIL exemption
The Community Infrastructure Levy (CIL) imposes a fee on the creation of new homes, which is determined by the local authority and is based on the size of the house. The good news is that, subject to certain criteria, self-builders are now exempt from paying CIL. That said, you’ll need to be extremely careful to have all the paperwork in place for your exemption; each step of the process needs to be followed to the letter to prevent CIL becoming chargeable.