Ensuring a sound financial plan is in place is undoubtedly key to the success of any self-build project, but when it comes to a residential development project there are more issues to be taken into consideration than with a traditional purchase. Buying and paying for your land, cash flow, build costs, construction type, planning permission, affordability and where you’ll live during the build can all have an impact on your finance.
Mortgages for self-build differ from traditional residential mortgages as with a self-build mortgage, the money is released in stages as the build progresses, rather than drawn down as a single amount on completion. There are two types of self-build mortgages, advance stage payment mortgages and arrears stage mortgages. With an arrears stage payment mortgage money is released in the traditional way, which is after each stage has been completed, whereas with an advance stage payment mortgage funds are released before each stage, improving cash flow and enabling materials to be purchased when needed to ensure an uninterrupted build flow.
There are now more lenders in the market who will consider a self-build mortgage, though with different self-build criteria, so it makes sense to speak to a broker who can look at your project individually and find the right finance to suit both your project and your personal circumstances, matching cash flow requirements with key build stages ensuring adequate funding is available at each stage.
So far this year, three lenders have introduced new advance stage payment products.
Any lender providing you with finance for your project will insist that you have adequate insurance in place before releasing funds to you and it’s important that you make sure you have adequate protection in place.”
Top five tips for choosing a self-build mortgage:
1. Firstly, don’t rush it. With a self-build mortgage, you may well need to put down a deposit of at least 15%, so make sure you have as much as possible saved before your project begins and take into account a healthy contingency just to avoid sleepless nights.
2. Understand your build process and choose a mortgage to suit your needs. Generally speaking, your first loan payment on a self-build mortgage will go towards paying for the land on which you are going to build. Further tranches of funding may be made once the foundations have been laid, and then once the property has been built up to the point where the property is ready for the roof to be constructed (or if where the frame has been erected in the case of timber frame construction). The last couple of payments usually come in when the property is wind- and watertight, when the interior walls have been plastered, and finally when the entire home has been completely built – or you taking the benefit of an advance stage payment mortgage, the last stage will be released to complete the property!
3. Plan, plan, plan. Within your mortgage application, you will need to provide a plan detailing how you will go about building your own home. The plan will need to provide the lender with enough information about what the project will cost and how the project will proceed and reassure them that providing a mortgage for the project will be a sound investment.
4. Be clear on payment stages. Most self-build mortgage providers release money after a stage of the project has been completed, so the bulk of the risk normally lies with you. However, some lenders provide the money at the beginning of each stage, enabling you to provide cash up front to buy the materials and hire the required skilled labour in advance.
5. Project management is crucial. Whether you choose to engage a professional project manager or manage the build yourself is up to you. But you will need to be realistic about the time needed to self-manage and make sure you can commit to doing so. Whenever your project reaches a stage that requires a mortgage payment, a property valuer will usually visit the building site to check the work has been completed and is on track with the project plan, so you need to make sure that the build is on track and that work is completed to the required standard.