Raising Finance: Self Build Mortgages
The good news is that self-build loans are quite different to traditional mortgages, and many lenders now recognise the increased property value and immediate profit to be gained at completion. This means that the plan to buy land and build is in itself considered an asset worthy of encouragement and investment. The bad news is that the interest paid on a loan is probably going to be one of the biggest expenses attacking your end-profit and, if things do not go according to plan, the amount you finally pay may eat up all the net gains. In short, the financial advantages of self-building can be wrecked by too much borrowing and too little planning.
Living in an existing home whilst the new one is built may offer comfort and convenience, but how will it affect your budget and final profit margin? Although the existing home can be used as security to raise finance, it is likely you will need to borrow more to buy the land and meet construction costs. This in turn involves paying more interest on the loan and probably from an earlier date. Conversely, selling the existing home may provide enough capital to buy land and prepare it for building on; there may even be enough to begin the first stage of construction. This means the total loan amount would be reduced along with the level of interest and, importantly, repayments would begin much later into the project. There would, however, be more discomfort and further expenses for on-site accommodation.
Making the right decisions now, according to personal and financial circumstances and the nature of the self-build project, will impact on the success of your venture. What is appropriate for you may not be suitable for someone else and, although you should listen to the experiences of other self-builders, it is not always wise to adopt the same financial plan. Instead, examine all of your options and progress them to a theoretical conclusion, as this will help you identify a strategy that best fits your own situation. But, regardless of the financial plan, bear in mind that the primary objective should be to pay as little loan-interest as possible, because this will improve proportionately the profit you make at completion. To keep interest payments low, you should:
- have a carefully drafted expense plan so you only borrow according to need;
- aim to acquire the most flexible type of loan with the lowest percentage of interest and with payments spanning over the shortest practical period;
- plan to buy the land out of personal funds, if possible, so that only the construction is subject to financial backing (delaying loan repayments and reducing the overall amount borrowed);
- examine the benefits of staged-payment self-build loans, which only involve you borrowing money as required for each phase of construction, but where the total amount of advance has been agreed.
It was once very difficult for people who wanted to build their own home to obtain financial support from traditional lenders, but with some 20,000 self-build projects starting each year, accounting for one in eight of all new homes, lenders are supplying a variety of products to meet the rising demand. There is now an array of banks and building societies offering a range of loans, and of these the Norwich & Peterborough , Britannia, Skipton, Lloyds TSB, The Nationwide, and Bradford & Bingley (in association with Buildstore Ltd), are amongst the most pro-active.
If you intend raising funds through a lender, bear in mind the following:
- Most lenders require a structural guarantee in the form of an insurance policy for the completed dwelling. Costs vary according to the provider, the size of property, range of cover and number of inspections conducted during construction. Further details about structural indemnity policies can be obtained from the National House Building Council (NHBC) 'Solo' scheme (01494 735363), Zurich Municipal 'Custom Build' scheme (01252 387592), FE Wright 'Project Builder' package (0207 7165050), and online at www.self-builder.com
- There are no self-build loans currently available for 100 per cent of the entire project cost. Typically, they range from 50 per cent to 80 per cent of land value, which means you will require some degree of accessible capital to begin with, and up to a maximum of 95 per cent of the completed property value.
- You will only be able to borrow up to your level of repayment risk, assessed according to the lender's own criteria. Ordinarily, this means three times your annual income plus one times that of your partner.
- Many lenders make it mandatory for borrowers to have adequate site insurance to protect against damage caused to the building during construction and theft of materials.
- The success of your loan application will not be entirely dependent on your financial circumstances or your ability to repay the sum borrowed. It will also depend on the quality and credibility of your presentation. Lenders will want to know that you have properly planned the project, made a thorough cost analysis and have available an itemised budget requirement. They will also consider your enthusiasm, experience, confidence in completing the building within an acceptable timescale and your reasons for undertaking the venture in the first place.
- Lenders usually require sight of adequate plans, produced by suitably qualified professionals, prior to a loan being considered or advanced. They will use these to assess the value of your plot of land and the end-value of your self-build scheme. Typically, they charge a 'valuation fee' for this service of £150 to £300.
If you are uncertain of which mortgage/loan company to approach or which variety of loans to apply for, a good starting point is to acquire a copy of the monthly magazine MoneyFacts from 66-70 Thorpe Road, Norwich, Norfolk, NR11BJ (01603 476476). This publishes explanations of the different types of mortgage and information about the rates available. They also have a website at www.moneyfacts.co.uk . There is no quick way of identifying the best self-build lender because there are simply too many variables to consider. What may be appropriate for one person and their particular project will not necessarily be suitable for another. The way forward is to contact a favoured few lenders and ask for written details of the products they have available, then consider the advantages and disadvantages of each before submitting an application.
New lenders are constantly entering the market, offering variations of the staged mortgage product. Every loan is slightly different and it is essential you spend some time and thought examining the merits of each one, with due consideration being given to your own self-build project and how the specific features of a loan may affect it. The elements to consider include:
What is the maximum loan-to-value (LTV)?
Who assesses the valuation of land and property (existing home, if applicable, and the new dwelling) and how much will this cost?
Are staged payments made in advance or in arrears of each stage? If in arrears, you will need to find funds for land purchase, materials and labour before starting each phase.
Is outline or detailed planning permission required as a condition of the advance?
Will you be charged for multiple inspections and valuation surveys prior to funds being released? Lenders often undertake formal inspections at the end of each stage.
What guarantees do they require from you that the construction will occur according to plan and within an agreed timescale? Penalties may occur if you go beyond an agreed timescale or go over budget.
How flexible is the lender going to be if you need or desire to alter the design of your self-build during construction?
Will they demand you take out a warranty or other form of structural insurance?
What is their policy on building regulation approval?
Are there any early termination/completion/redemption fees?
Are you allowed to 'manage' your own construction? Some lenders will insist on an architect or other professional 'project managing' the entire build.
What construction conditions are attached to the loan? Many lenders make restrictions on the type of build and materials that can be used.
Raising the finance to build your home is likely to be one of the most daunting aspects of the entire project and once you succeed beyond this stage, there is no turning back. The money will be in your bank account and you will be paying interest on it, so you must employ the funds as soon as possible. Make it work for you - not against you - go build your dream!
