05 Feb 2019

Financing your self-build project

This month, Stephen Malkin, Associate at Whiting & Partners, discusses your financing options when building your dream home.

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Borrowing to build

Self-builders require more money upfront than conventional homebuyers. This is because they have to buy their building plots and fund their planning applications before they can apply for any loans. Self-build mortgages tend to be interest-only as fixed-rate loans have substantial exit fees for those who change loans when the work is finished. Interest rates for loans are typically over 5% and self-builders should expect to take as long as six months to get their finances in place before applying for a loan. It is common to expect to raise around 25% of the cost of the land and building materials upfront, and before applying for a mortgage it is pivotal to have full or outline planning permission.

Lenders are guided by valuers because they do not want to lend on a property that is worth less than the loan. They need market evidence of the resale values of the properties they are about to build. This is especially true of prefabricated buildings; they will ask for documented evidence of both their long-term structural integrity and longevity.

Get properly insured

It’s recommended that you have your own self-build insurance policy for public liability, fire, theft and storm damage as well as for situations which could arise with tradesmen not completing the work. This can usually cost in the region of £500 to £1000, depending on the size of the contract.

Many self-builders worry about their builder going bust. It is possible to attain a National House Building Council (NHBC) warranty, whereby the NHBC will arrange to either hire another builder or pay for the remaining work to be completed.

Check your tax position

Stamp duty must be paid for properties purchased for more than £125,000 or £150,000 for non-residential land and properties.

For those gifted land by family members, no stamp duty is due, even if another residential dwelling is owned. Self-builders who pay for land pay no more than the initial stamp duty; however much the property is worth when completed. This has to be paid within 30 days of buying the plot and only when they sell their original property within three years can they claim this back.

New properties are free of VAT and, therefore, a self-builder can claim back most of the VAT paid on materials. However, the tax cannot be reclaimed on professional and supervisory services, tool and plant hire and household appliances such as cookers and fridges, even if they are inbuilt. You cannot claim back the VAT if you plan to use the property for a business purpose, but this does not extend to working from home.

Further information....

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