27 Jul 2016

Self-build mortgages explained

BuildStore’s Raymond Connor looks at the lending options for self-build mortgages, including arrears and advance stage payment options.

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Around 12,000 people build their own homes in the UK each year, from those that enjoy the DIY process to those who want to be involved in the design and leave the construction to the professionals. Every self-builder, and every project, is different, but there’s one thing they all have in common – they need to be properly financed.

If you’re self-building, traditional mortgages are far from ideal. Money is released at completion and exchange, while you’ll need funds long before to pay for work as the project goes along. Specialist self-build mortgages are tailored to suit, and happily, the number of lenders operating in the sector is ever increasing.

Stage payments

The difference between specialist products and traditional mortgages is that they enable you to draw down funds at key stages of the project. There are typically six stages of release, starting with land purchase, through to foundations, construction to wall plate level, building made watertight, and so on.

From the outset, it’s important to have a comprehensive budget and as much detail about incomings and outgoings as possible so you know precisely how much funding is required at each stage. Financial specialists with a background in construction, such as BuildStore, will be able to offer guidance on this – as will your quantity surveyor or package home company.

There are two types of self-build mortgages that operate within the stage model: arrears products, where the payments are given as each stage of the build is reached, and advance products, where the funds are released prior to work commencing on each stage.

Arrears stage payment mortgages

Here the lender will release money to buy the plot, usually up to 85% of the purchase price or value of the land. Following from this, money can be drawn down to correspond with the stages previously outlined once the work has been completed. With an arrears mortgage, your lender will require a valuer to visit the site at the end of each stage and submit a report to the lender before they will release any money.

This type of self-build mortgage is best suited to those who already have sufficient funds to put into the development. For example, if you have already sold your existing home and have cash readily available to get your project off the ground. For those on shorter means, this kind of mortgage can lead to cash shortfalls during the build and delays whilst you wait for the valuation report to allow the next cash payment.

Advance stage payment mortgages

Pioneered by BuildStore, advance stage payment mortgages – otherwise known as accelerator mortgages – were designed for self-builders without access to the cash required to pay the deposit on the land and the first build stages.

Here, money is released at the beginning rather than the end of the stage, giving you access to the cash exactly when it’s needed. It also lends a generous percentage of the costs – up to 85% on the land and up to 85% of the cost of the build. This low deposit could also mean there’s no need to sell your existing house to raise money before your new home is complete.

Furthermore, these stage payments are not subject to confirmation by a mortgage valuation at each stage (although some lenders may want interim valuations to check on progress). Simply having money in the bank when you need it puts you in a stronger negotiating position when buying materials, and means you can keep your contractors happy by paying them in plenty of time.

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