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Approximately 12,000 people in the UK build their own homes every year and it is easy to understand why. The one issue which causes concern for most self-builders is finance, particularly if the project is being funded via a mortgage. Unlike a traditional mortgage, money for a self-build project is not provided in a single lump sum up-front; it is drawn-down in stages as the project progresses. It is therefore very important to have a detailed budget prepared so that you know precisely how much is required at each stage of the project. If your budget is not realistic, there is a possibility you could run out of money, so time spent planning before you start is time well spent.
Self-build mortgages are actually very straightforward: money is released in several stages as the build progresses. Most stage payments are based on a typical five phase build schedule: purchasing the land and laying foundations, construction to eaves level – and erecting timber frame, if appropriate – building made wind and watertight, first fix and plastering, and then second fix to completion.
Budget planning
It is important for self-builders to ensure they understand how much different lenders are willing to lend, as it may differ from lender to lender. For example, Saffron Building Society will provide self-build mortgages up to 65% of the purchase price of the land; 100% of the build costs (subject to the LTV not exceeding 75% at any stage); and a gross development value (final build value) of 75%. In addition, it also enables payments to be made on an interest-only basis during the build phase, which helps with cashflow.
As stage payments are requested, a local valuer will be instructed to inspect the project to ensure that everything is on target. You will also need funds of your own, not only to make up the difference between your mortgage and the total cost of the project, but to also ensure that you do not hit any cashflow problems if materials need to be purchased and contractors paid before stage payments are made.
All other aspects of the mortgage, such as affordability requirements and proof of income, are exactly the same as a traditional mortgage. Do bear in mind, however, that as you progressively draw-down your mortgage funds, your monthly mortgage payments will increase. Your budget planning should therefore include an analysis of not only the costs of the project, but also the impact it will have on your own personal finances. You will also need to provide proof of planning permission and also building consent; you will be asked for the building’s warranty insurance to be put in place as well.
Do not be put-off self-building because of concerns about the apparent complexity of planning your finances and arranging a mortgage. It’s not really that difficult and, to help, you can also find self-build mortgage guides that will explain the funding issues in detail and give you a typical example of a self-build project to help clarify precisley how self-build funding works.