It’s important that you get your finances in order before you embark on your self build. Its too late to start thinking about raising a loan when you are halfway through the Build. What are the consequences for you and you family if you run out of cash before you can get the house shell weathertight?
If you are not fortunate enough to be able to build a home using savings or funds from the sale of your previous home, you will need to borrow money. Many self builders use a combination of savings and borrowed finance to fund their project.
One possibility is a bridging loan. If you own your existing home or have enough equity in it, you may be able to take out a bridging loan to pay for your new plot and possibly fund the build cost. Once your self build is complete, you would then sell your old house to pay off the loan. Note that a regulated bridging loan secured on 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.
If a bridging loan is not right for you, there are self build mortgages that are available from a few specialist lenders.
What’s a self build mortgage?
A self build mortgage is a method of funding a residential self build where the asset starts at zero and gradually increases in value. While a standard house-purchase mortgage releases a single lump sum upon completion of the house sale, a self build mortgage releases the money in stages as the build progresses and the asset value grows.
There are two types of self build mortgage:
Arrears, where the stage payments are made AFTER completion of each stage of the build
Advance, where the stage payments are made BEFORE the start of each stage of the build
You might think that the Advance-type mortgage is the obvious choice so that you don’t have to pre-fund each stage yourself. However, there are pros and cons to each type of self-build mortgage. For example, the Advance-type mortgage typically has a higher rate of interest than the Arrears-type. You will need to examine the detail to figure out which type is suitable for your particular financial circumstances.
On an arrears-type mortgage, some lenders will release money to buy the plot. This could be between 50% to 85% of the purchase price or the value of the land. Thereafter, you will have to complete each stage using your own funds before you are able to request a stage payment. So, an arrears-type mortgage requires you to have sufficient funds of your own to start the self-build project. You will need anything from 15% to 50% of the cost of the land purchase. In addition, you will need your own funds to pay for the first build stage
On an advance-type mortgage, some lenders will also release money to buy the plot. This can be up to 90% of the purchase price or the value of the land. Thereafter, the funder releases money for each stage of the build prior to each stage. In effect, this gives you the cash required to buy materials and pay your contractors. In total, you could expect to receive up to 90% of the build cost. In effect, for an arrears-type mortgage, you only need to find a small deposit for the land purchase.
Is Arrears or Advance best for your particular circumstances?
An Arrears-type might be more suitable where:
• you have a large cash savings
• you already own the plot of land, allowing you to remortgage it to fund the first build stage
• you have released equity from an existing house
An advance-type mortgage might be more suitable where:
you have limited cash available, insufficient to pay labour and materials bills when due
You want to remain in your existing house until the new one is built
You want to retain your current cash for contingencies
However, the disadvantages of Advance-type mortgages are:
• The cost of borrowing is higher than Arrears-type mortgages due to the level of risk
• Only a few lenders offer this facility; there is limited choice
• Additional security may be required by the lender, in the form of an expensive insurance policy
• 10% of total borrowing is retained until Building Control issue a completion certificate
What are the stages of fund-release
For a timber frame construction, the stages of fund-release are typically:
1 Purchase of land, plus minimum Outline Planning
2 Preliminary costs & foundations
3 Shell erected
5 First fix & plastering
6 Second fix to completion
Custom Build or Group Self Build
1.Purchase of land
2.Preliminary costs; shell erected
5 First fix & plastering
6 Second fix to completion
Interim and final valuations will be carried out at each stage of the build. For each such valuation, the surveyor will present a report to the lender to evidence the increase of the interim value(s) prior to interim and final release of funds from the lender. You will need to pay the valuation fees. There can be as many as 7 valuations and it is worth enquiring if the surveyors valuation costs can be included in your total project cost.
Applying for a Self Build mortgage
Approved type of Construction
Some lending institutions will not lend on certain types of construction, so do ensure you check with them. Of course, all your design and construction methods will need to be compliant with the current Building Regulations.
Some lenders require a fixed build cost budget; others may require a cost breakdown prepared by a Chartered Quantity Surveyor. You will need to find out from prospective lenders how they want the build costs presented. Also, check what percentage contingency is required as part of the build cost estimate. Your estimate of the full project cost should include:
Land purchase and associated fees
Project management, including health and safety compliance
Gaining planning consent
Demolition and/or site preparation
Cash flow management is critical. It’s important that you inform the lender of the payment terms and conditions proposed by your suppliers. Ideally, you should have previously advised your proposed suppliers that you intended obtaining a staged payment mortgage. When you know how your lender will release funds to you, you can then agree a payment schedule with your suppliers. It’s useful to provide the lender with a schedule showing how the stage valuations mesh with the stage payments and the subsequent supplier payments.
Site Insurance and Structural Warranties
A bank or building society may not release initial funds until you can demonstrate that you have a 10-year structural warranty policy in place. When taking out your warranty, it’s also a good time to ensure that you have the right site insurance policy in place to give you peace of mind should anything go wrong. Anyone undertaking a build project, whether borrowing or not, should have both in place prior to starting work on site.
Additional documentation will be required, including copies of:
Land purchase documents
Construction drawings and specifications
Building Regulations approval; SAP calculations
Liability insurance (Architect’s professional indemnity, Builders PL/EL)
Experian credit report.
An initial valuation is carried out by a RICS surveyor to establish current value and anticipated end value. You will be required to pay the surveyors’ valuation fee.
It can take up to three months to process a self build mortgage.
How Much Can you Borrow?
You must demonstrate to the lender that you will have sufficient funding ability and competence in place to complete the project. A mortgage will not be granted if it is deemed not to be affordable. Banks and building societies apply their own affordability calculation to assess your borrowing limits. There will be a focus on income and expenditure, cross checked against bank statements.
Where you intend to live while you build will have an impact on your affordability to borrow. This needs to be considered as you deliberate between living in a current home, renting accommodation, buying a caravan to live on site, or perhaps living with family members? If you are making monthly rental or mortgage payments, this will impact your affordability calculations. One way around this might be to make
these payments in advance so that they don’t affect your monthly income versus expenditure calculation.
You also need to check your own affordability. Would your net monthly disposable income enable you to borrow funds based on a stress test rate of interest of up to 7.5% on a capital and interest basis (repayment)? You can use the following income multipliers:
Single application: up to 4.5 times the single income.
Joint mortgage application: up to 4.5 times the highest salary, plus second applicant’s salary, or 3.5 times joint income.
Subject to affordability, banks and building societies are keen to lend on residential construction projects. However, you need to show that you are organised and have carried out a prudent risk assessment of your project. The Build Route needs to be clear so that you the lender is assured that you will successfully construct your new home.
Are Self Build Mortgages More Expensive?
Rates of interest are higher than standard house purchase/remortgage rates of interest and vary from 3.75% to 6.5% per annum; the arrangement fees also vary from lender to lender. Bridging facilities are more expensive ranging from 0.59% to 1.5% per month and the arrangement fees can be quite high; between 1% and 2% of the total borrowing facility. This can be with or without incurring exit fees. You may be tied into the lender for between one and three years, again lender and product dependent.
Once the property is habitable and this has been confirmed by a RICS’ qualified surveyor and issue of the Building Control completion certificate, some lenders permit the borrower to ‘switch’ to a lower rate of interest during the ‘tie-in period’ without incurring penalty interest.
What are the typical features of a Self Build mortgage product?
Rates of interest are higher than standard house purchase rates of interest and the vary from 4% to 6.5% pa. Minimum contract periods and arrangement fees vary from lender to lender. Be aware of consultant and/or broker fees and check to see if there are any ‘hidden’ fees applicable at a later stage of the build. In brief, read and understand the contract conditions before you sign it!
Providers of Self Build Mortgages
You can obtain a self build mortgage from a high street lender or through a specialist mortgage broker. Mortgages of this type are regulated by the Financial Conduct Authority.
A convenient list of the latest self build mortgages and deals is provided at ……
Providers of Site Insurance and Structural Warranties
Self Build Zone
Q Assure Build