Financing a self build usually means obtaining a self build mortgage from a high street lender or through a specialist mortgage broker.
A self build mortgage differs from a mortgage that you would use to buy a house. 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.
For a timber frame construction, the stages of fund-release are typically:
1 Purchase of land
2 Preliminary costs & foundations
3 Timber frame kit erected
4 Wind & watertight
5 First fix & plastering
6 Second fix to completion
The staged release of funds can occur in two very different ways:
On an arrears-type mortgage, the lender will release money to buy the plot. This could be between 50% to 85% of the purchase price or the value of the land and so you will need a sizeable deposit for the land purchase.
Thereafter, you will have to complete each stage using your own funds before you are able to request a stage payment. A valuer will inspect each completed stage on behalf of the mortgage provider.
As you can see, an arrears-type mortgage requires you to have sufficient funds of your own to start the self-build project. This might be the case where:
• you already own the plot of land and can remortgage it to fund the first build stage
• you have already released the equity from an existing house
On an advance-type mortgage, the lender will also release money to buy the plot. This could be up to 95% of the purchase price or the value of the land and so you only need to find a small deposit for the land purchase.
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 95% of the build cost.
An advance-type mortgage is suitable if you have only a small amount of cash available. It allows you to:
• Stay living in your existing house until the new one is built
• Hold on to any cash that you have available as a contingency fund
Self Build Mortgage
Many self builders and renovators will need a combination of savings and borrowed finance to get their project off the ground. Luckily, there are specialist mortgage products available
Inadequate finance can put a halt to your project before it’s even started, whether you are planning a conversion, self build, extension, rebuild, conversion or custom build.
If you are not fortunate enough to be able to build a home using savings, or with the funds from the sale of your previous home, you will need to borrow some money to finance your build. This is where a self build mortgage will come in handy.
How are Self Build Mortgages Different?
A mortgage for a self build, custom build, renovation or conversion project is tailored towards the way you ‘pay’ for your finished project. Funding is released in stages at key, identifiable times during the construction, rather than all at once on completion day. As a result you typically need a specialist and experienced mortgage provider.
There are two types of self build mortgage:
- the arrears type, where the stage payments are given as each stage of the build is reached
- the advance type, where the stage payments are released at the start of each stage of the build
The arrears-type self build mortgage is suitable for those who have a large cash injection of their own to put into the project.
The advance stage payment mortgage means that the money is in their bank and, therefore, available at the point of need when labour and materials bills fall due — removing the need for short-term borrowing/bridging loans to cover the shortfall.
Disadvantages of Advance Stage Payment Mortgages
- The cost of borrowing is generally higher than other arrangements due to the level of ‘risk’
- Only a very few lenders offer this facility too, so there is limited access to lender products
- Currently advance funding may only be secured on a Single Premium Policy, which provides additional security to the lender. The cost of this premium is high
- Ten per cent of total borrowing will be retained until Building Control has issued a completion certificate
- Remember to take this into account when addressing ‘cash flow’ during and on conclusion of the build project
Have an open dialogue with all of your contributors to ensure the lender’s stage release funding model is compatible with their payment terms.
Cash flow management is critical.
Some lending institutions lend on the land purchase or existing property and at key stages during and on completion of the build project.
This can vary from:
- 75-90% of the purchase price or valuation (whichever of the two is the lower)
- up to 80-90% of build costs
- up to 75% of the growth in value of your project at key stages during construction.
Some lending institutions do not lend on land, but they will lend during the build period.
Products available include:
- discount from standard variable rate of interest
- fixed rate of interest
- bank base rate tracker
Rates of interest are higher than standard house purchase/re-mortgage rates of interest and vary from 4-6.5% per annum. The arrangement fees also vary from lender to lender. 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. Do bear in mind that consultant and/or broker fees vary. Beware, too, of ‘hidden’ fees that you only become aware of at a later stage of the build.
When Will the Funds be Released?
- Land (with the minimum of outline planning consent)
- Wallplate/eaves height (just before the roof trusses go on)
- Wind and watertight roof tiled
- First fix
- Second fix
- Certified completion
Custom Build or Group Self Build
- Purchase of land
- Associated preliminary costs and substructure
- Construction to wind and watertight stage
- First fix
- Second fix and completion
Where Are You Going to Live When Self Building?
Are you intending to live in your current home, rented accommodation, a caravan on site, or perhaps live with family?
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.”
Some lenders will accept you making upfront rental payments, which will not have an impact on your monthly income versus expenditure.
Your Method 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.
Each lender’s criteria are different, but you do need to ensure they are aware of your build type and of the payment terms and conditions your supplier has stipulated.
Do not agree any payment schedule with your builder or suppliers until you know how your lender will release funds to you.
Your Build Cost
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. Check with your lender what they require. Also, ensure that you include a minimum of a 20% contingency built into your build cost estimate.
In addition, as part of your full project costs and budget control estimate that you provide your lender with, you’ll need to identify (or at the very least estimate) the following costs:
- Land purchase and associated fees
- Project management, including health and safety compliance
- Gaining planning consent, if not already achieved, and associated fees
- Demolition and/or site preparation
- Construction design fees
- Construction costs (preferably estimated against Building Regulations drawings).
You must demonstrate to the lender that you will have sufficient funding ability and competence in place to complete the project.
How Much Can you Borrow?
As a guide to help you gauge your potential borrowing facility, the income multiplier may be:
- 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.
Banks and building societies apply their own affordability calculation to assess your borrowing limits. 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)? A mortgage will not be granted if it is deemed not to be affordable.
Are Self Build Mortgages More Expensive?
In effect a self build mortgage is exactly that, the only difference is the fact that funding is released at key, identifiable stages during the construction project and in most instances funds are also released to assist with land/existing structure purchase.
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 dependant.
Once the property is habitable and this has been confirmed by a RICS’s qualified surveyor; building control have issued a Completion Certificate, at that point lenders may then permit the borrower to ‘switch’ to a lower rate of interest during the ‘Tie in Period’ without incurring penalty interest.
Also 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)? A mortgage will not be granted if it is deemed to be unaffordable or irresponsible lending!
Applying for a Stage Release Mortgage
Supporting documentation required is basically the same as a ‘standard’ mortgage. After all, stage release residential funding is a mortgage from day one, except that funds are released in stages.
Additional supporting documentation required will typically include:
- Copy of planning permission
- Copy of construction drawings and specifications
- Copy of total project cost estimate (where possible, fixed-price contracts)
- Copy of Building Regulations approval
- Copy of site insurance and structural warranty
- Architect’s professional indemnity cover (if required)
- SAP calculation (this will be in the Building Regulations package)
- Experian credit report.
An initial valuation will be carried out to establish current value and anticipated end value, too. You will be required to pay the valuation fees. Interim and final valuations will also be requested and carried out by a RICS valuer.
The reports will be presented to the lender to evidence the increase of the interim value(s) prior to interim and final release of funds from the lender. Again, you, the client, will pay the valuation fees. A typical timescale for processing a stage release mortgage is up to three months. Consultants, brokers, banks and building societies will carry out a ‘forensic’ analysis of all supporting documents. In particular, they will focus on income and expenditure cross checked with the bank statements.Where can you get a Self Build Mortgage?
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 your old house once you had completed the new one and pay off the loan.
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. Subject to affordability, banks and building societies are keen to lend on residential construction projects, providing you have carried out due diligence and engaged the appropriate team(s) to achieve the successful construction of your new home.