29 Jan 2015

Finding the right mortgage scheme for you

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Although it’s easy to get carried away with the ‘niceties’ of a home-build project, such as design, build schedules and materials, none of this will be possible without a secure and appropriate financial arrangement. Rachel Pyne from Buildstore explains more.

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So you’ve decided this is the year that you are going to make your dreams and plans a reality by embarking upon a self-build project. However, whether you are a first-timer or a ‘seasoned self-builder’, you are likely to need funding in place to drive your home-building project through its various stages.

But before you head off out to visit your local high street lender or building society, it’s worth noting that the traditional routes of obtaining a mortgage simply may not apply. Building a house from scratch, converting or renovating is a huge undertaking and requires a more specialist approach.

When it comes to a home-building project there are so many more issues to be taken into consideration, such as buying and paying for your land, cashflow, build costs, construction type, planning permission, affordability and where you’ll live during the build – all of which can impact on your finance.

A mortgage for a self-build differs from one you would use to buy a house because a self-build mortgage’s money is released in stages, as the build progresses, rather than as a single amount. In most cases, interest is only paid on the amount you have drawn down during construction. All lenders have different self-build criteria, so it’s important to speak to an expert who can look at your project individually and find the right finance, both for your project and your personal circumstances. The following points must be considered prior to completing financial arrangements.

1. Land purchase

Important questions to ask yourself are: can you afford to purchase your plot outright; will you need money to purchase the plot; do you need to sell your current home first to release equity; what percentage of deposit is available to you? These are important to establish as some lenders don’t lend on land value alone.

2. Understand your build costs

There are many factors that can impact on your build costs, such as site conditions, and obvious elements like the size of property, labour, the type of materials you want to use and indeed the location you want to build in. Many of these decisions will impact on which lender is right for you, for example some lenders don’t like to lend in remote areas, some will only lend on properties with no more than two storeys and some will only lend on certain roofing materials or construction types.

When it comes to your total project cost, land is roughly 40% of the overall cost, but this does of course vary geographically. Materials and labour will account for a further 45% and the final 15% will be made up of insurances, professional fees and utility costs – items often overlooked causing a shortfall in funds.

Make sure you factor in your ongoing living costs as these can also affect what funds you have available to put into your project, and indeed the timing of when you can input your own funds if you are relying on the sale of your existing property during the build.

3. Construction type

Many lenders will only lend on certain, and sometimes limited construction types. Many lenders won’t finance renovations, or more modern building methods such as SIPs and ICF. Fewer still will lend on certain sustainable building styles such as hemcrete or straw bale. If this isn’t established in the early days, you may end up with a lender that stops lending, or you may need to change your plans part way through, incurring unexpected additional cost.

4. Affordability

You need to establish how much you can borrow early on to make sure your project is affordable and to know you can complete it with your own funds, plus what the lender will provide.

5. Cashflow

Cashflow is the lifeblood of your project. To ensure adequate funding throughout, it’s vital that cashflow is matched to each project stage. Make sure you’ve worked out exactly how much money you’ll need to pay out for materials, tradesmen and specialist services at every stage so that available funds match your project. For example, a timber frame construction is more expensive in the early stages than a brick and block build as you have to pay for the whole system up front.

Payments at the right time

There are two types of self-build mortgage: those that pay in advance of each stage of work being complete, and those that pay in arrears.

The traditional type of self-build mortgage is on an ‘arrears’ basis. The first payout during the build usually comes after the foundations have been completed – although some products will only release after ‘wind & watertight’ stage – and a valuer has visited the site. This means that you will have to provide the money to get up to this point in the build, including land purchase, materials and labour. This type of mortgage is best suited to those who have sufficient savings to fund the early stages of the build as well finances for the land deposit. For example, if you already own the plot of land and can remortgage it to provide the funds to start the build, or if you have already sold your existing house and have cash available to buy the land and start the build, then an arrears mortgage may be the best option for you.

However, not everyone has the cash required to get to the first build stage – or is able to release equity from their existing property to buy or put down a deposit on land.

BuildStore is one company who recognises that not every self builder has access to the cash required to pay the deposit on the land and the first build stages so have created an alternative – the Accelerator Mortgage Scheme. Here money is released for each stage of the build at the beginning rather than the end of the stage providing cash to buy materials and pay the builder. This will work for you if you have only a small amount of cash available and don’t want to sell your existing house to release equity before your new one is complete or you want to keep the cash you have available until later in the project to maintain a good contingency fund. If you are considering timber frame construction this financing provides cashflow for the upfront costs such as manufacture, delivery and on-site construction.

Self-build is open to everyone and mortgages for self-build are available from many banks and building societies. But when it comes to arranging finance, given the complex criteria and huge variance between lender products, make sure you consult with an expert who can find the right finance for you, based on both your financial needs and project requirements.

So there’s plenty to think about, and therefore, the sooner you can start to arrange your finances the better!

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