Starting Out: Where will I get the money?

ABOVE: Catherine and Donald Bisset bought their plot for £165,000 and spent just £150,000 on the build itself - building a five bedroom family home on a DIY basis with a stage payment mortgage. Read more about this project.

We meet at lot of people who want to self-build but have little idea just how to go about it or what they can afford to do. The ground rules are not so very different to buying a house conventionally, but the process is longer and more complicated. And of course you have to find somewhere to live during the building phase. If you can work round these constraints, the next stage is to undertake your own financial audit. Start by asking yourself some key questions:

How much are you worth?

If you don’t already know, work it out. Value your home, if you have one. Bear in mind that in the current market, houses are fetching substantially less than they were back in 2007, so don’t be overambitious on this front. Be realistic — get an estate agent to value your home if necessary. Tot up the value of other assets such as pension plans, savings, other properties and shares in businesses. Then deduct any borrowing you may have from the total, and also any tax liabilities you might incur if you had to sell assets quickly. Then ask yourself: how liquid are these assets? Are most of them in your home? If so, are you prepared to sell it in order to raise finance for your project? You will be in a better position to proceed if you have cash in the bank rather than having a house to sell.

How much can you borrow?

This depends on your income and your assets. It also depends very much on the willingness of the banks to lend. Contrary to much press speculation, the banks haven’t stopped lending altogether — it’s just that they are being much more conservative than they were up until 2007 when the credit crunch began to bite. The best way of finding out your borrowing capacity is to talk to some lenders, although this can be hard without a specific project in mind. However, it is sometimes possible to get a lending-in-principle understanding with a helpful bank manager, which does give you the confidence to start looking for opportunities within a certain price bracket.

What borrowing can you live with?

It’s all very well being offered loads of money from your lender, based in part on the value of the asset you are about to create. But can you afford to live with the interest payments? Or, more to the point, do you want to? If you can’t or don’t, then you may have to accept that you will have to move on to another project (or just a smaller house) sometime in the near future. This in turn dictates what you should build. Always play safe and never rely on the hope of a rising market to help you out.

SELF-BUILD MORTGAGES

Mortgages for self-build projects work a little differently to regular mortgages. Lenders usually release money at various stages of a project (in addition to a chunk for the land) up to 90% of the land and build cost. Lenders traditionally released payment as stages were completed but the Accelerator mortgage by BuildStore (www.buildstore.co.uk) lends money upfront of work.

TAX

There are some important tax considerations which you need to be aware of.

Principal Private Residence Relief (PPR) Your principal home has always enjoyed certain tax exemptions. However long you stay in it and however much it may have gone up in value over the years, you do not have to pay any tax when you come to sell. It is free from Income Tax and Capital Gains Tax. The only tax which can be levied on your main home is Inheritance Tax, levied on your estate.

As a self-builder, your development is included under the PPR umbrella. Indeed, the umbrella is extended to include both your existing home and the one you are building, as long as you eventually move into it and it becomes your PPR. In contrast, developers and buy-to-letters are taxed on any profits they make.

VAT Ever since VAT was introduced on building work in 1984, an exception has been made for new build property, which has remained zero-rated. This means that anyone (including selfbuilders) who is creating a dwelling for the first time (this thus includes things like barn conversions) is able to claim VAT back on materials purchased and withhold VAT payments to labour and supply and fix subcontractors. In contrast, alterations to existing houses have to pay VAT at the full 17.5%. Key “DIY Reclaim” into the Revenue & Customs website search field at www.hmrc.gov.uk to learn more.

Plot vs Build: What to allow

Believe stalwarts of the housebuilding trade and you’ll often hear the old ‘third’ split — 1/3 plot, 1/3 labour, 1/3 materials. While the even split between labour and materials often bears out to be true, the cost of the plot as part of this total can vary enormously. Here’s some recent examples:

Further reading:

• What about plots?
• What kind of house to build?
• The practicalities of self-building
• Taking Stock

Return to 'The 12 Steps of Self Build - Starting Out'