Before you head 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 to your home-building project. Building a house from scratch is a huge undertaking and it requires a more specialist approach. Where traditionally a house buying mortgage is released in a single lump sum, a mortgage for a self-build is released in stages, as the build progresses. 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.
Chicken or egg? – land or finance?
Finding land can be one of the most challenging aspects of self-build and it’s easy to get carried away with your pursuit of that dream plot. But before you invest time and commit to a plot there are certain questions you need to ask yourself: 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? This is important to establish as some lenders don’t lend on land, whereas others will – but with varying amounts – from say 50% to 85% of the plot value.
Like the ‘chicken and egg’ scenario, at BuildStore we are often asked whether it’s best to find land before applying for a mortgage, or vice versa. It can be extremely beneficial to carry out preliminary research into your ideal location on plot-finding websites such as www.plotsearch.co.uk which will also give you a good idea of plot prices, availability and borrowing requirements. However, unless you have the funds to initially purchase land, until you have a mortgage approved you will not be in a position to secure that dream plot.
Budgeting and planning
To obtain funding, lenders will want to know how much you estimate the project will cost. When it comes to your build costs, land will roughly cost 40% of the overall cost of a project, but this does of course vary geographically. Materials and labour usually 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. Using tools such as BuildStore’s online build cost calculator will greatly assist in the budgeting of your build.
Make sure you factor in elements such as 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.
A lender will want to see detailed plans for the property, projection costs and planning permission details. It’s worth bearing in mind that this application process can take on average five months. You will have to be clear on all aspects of the project including the trades and materials being used. Key project factors – such as build time, construction method, materials, location and schedule of works – will impact on which type of lend is suitable.
Find the right mortgage scheme for you
Your self-build mortgage will be as personal as your build project, so by utilising expert advice you will be able to determine which is the right mortgage scheme for you.
• Arrears stage-payment mortgage:
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 – some products will only release after becoming wind and watertight – and a valuer has visited the site and signed off works. This means that you will have to find the money to get up to this point in the build - for 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 as sufficient savings for the deposit on the land.
• Advance stage-payment mortgage:
Not every self-build has funds to secure land or get to first build stage. With BuildStore’s unique Accelerator Mortgage Scheme, funds are released for each stage of the build at the beginning rather than the end of the stage giving you the cash you need to buy materials and pay your builder. It also lends a generous percentage of the costs – up to 90% of the cost of the land and up to 90% of the cost of the build.
Review your rate
It makes financial sense to review your mortgage and financial commitments once your build is complete. The average end loan-to-value on self-builds is 58% with the average cost-to-value being 72%. Operating on a ‘whole of market’ basis, with access to all of the top lenders, as well as mortgages available on an exclusive basis, BuildStore can provide you with a level of expertise and knowledge not available by going direct to a lender.