Don’t let your self build hang in the balance due to a lack of funding. David Snell explains the process of raising finance to both buy the plot and carry out the build itself — whether you plan to stay in your current home or sell up first.
1. Self Build Mortgages Aren’t so Different from Regular Mortgages
There’s no significant difference in the principles behind a self build mortgage than those on an ordinary house purchase. If you want to buy a house, you have to have a deposit and you have to be able to service a mortgage. The amount you can borrow is, thus, determined by your income — typically three to four times.
Exactly the same pertains with a self build mortgage except that, apart from the land, which has an inherent value, there is as yet no house. So the costs of building, including the costs of buying the land and all other ancillary costs, have to be estimated and approved beforehand. That moves the handling of self build mortgages over to specialist companies, banks or building societies.
Significantly, it makes the mortgage amount dependent on the costs of the project rather than the value. And although there is a maximum loan to value, that doesn’t normally come into play because the project costs are likely to be lower than the end value.
2. You’ll Receive the Money in Stages — so Budget for Each Tranche
The one distinguishing factor of a self build mortgage is the existence of stage payments. These can be in arrears – that is to say that funds are released once a stage of the build has been completed – or they can be issued in advance by means of an accelerator mortgage, whereby the money is released to you at the commencement of each stage. The latter is particularly suitable for those with lower equity or a small deposit, as it means that they can be in positive cash flow throughout the project. However, for those with a larger deposit or more fluid funds, the arrears-type stage payments may be better suited.
Most self build mortgages consider the land purchase the first stage payment, typically giving around 75% to 80% of the land value as the first tranche of money.
3. Get the Finance in Place or You’ll Lose Out
Self-build is as much driven by the availability of suitable finance as it is by the desires of those who undertake it. Before any project gets off the ground, thought has to be given as to where the money is coming from, particularly in relation to the land purchase. Because the plain fact of the matter is that you can’t hang about when buying land. Most vendors won’t wait for people to sell their house and many also impose a strict timetable for exchange of contracts or completion. And, if you haven’t got the money when it’s needed, you’ll lose out.
4. It’s Usually Best to Sell Your Existing Home Before Embarking on a Self Build
Many self builders choose to sell their home first, because it makes things simpler and frees up what equity they have in their existing property. If, once your old home is sold, there’s sufficient left over to buy the land outright then simply arrange a self build mortgage in order to provide the funds for the build process on land that you already own. If this isn’t sufficient to buy the land outright but you can demonstrate that you can service a loan which, added to your capital and savings is enough to complete the project, then you’re in exactly the same position as the first-time buyer — only with a larger share of the equity. Both these scenarios are simple, uncomplicated and relatively risk free because you’re not committing yourself before funds are available and you’re not so much a hostage to any wild fluctuations in the market.
5. If You Don’t Want to Sell, You Could Remortgage
If the equity in your existing home is sufficient to buy the land and build, then there’s a possibility that you will be able to stay there during the project. You will, however, need to remortgage the property in order to provide the funds for the project. And, you will need to be able to demonstrate that you have the income available to service that new mortgage and that the total amount of the remortgage is no greater than 75% to 80% of the value of your existing home. When the new home is finished you can then either sell it at your leisure or perhaps decide to hold onto it, remortgaging it yet again as a buy to let, and renting it out.
6. If You Do Have to Sell, You Can Still Buy the Plot First
If the equity in your current home is only sufficient to buy the land, then you will almost certainly have to sell up, unless you have other savings, before actually commencing the build. But it doesn’t mean that you can’t use that equity to buy the land in the first place.
What it does mean is that you can’t use a self build mortgage to buy the land with the intention of building sometime in the future. Because all of the self build lenders, in a deliberate attempt to exclude developers from their preferential terms, require that applicants demonstrate that they have the funds available to not only buy the land, but, also, to commence work within six months and complete the build within two years. And they won’t accept equity in the existing home as those funds!
But all is not lost. Because, so long as it stays below 75% to 80% of the value of your current home and, so long as you can demonstrate your ability to service the new loan, the way around this is to remortgage the existing home and to use the released capital to buy the land outright.
7. And if You Still Need Money?
If, having remortgaged, you’re not left with sufficient equity to complete the build, the answer is to get a self build mortgage. So long as you can demonstrate your ability to afford the proposed final mortgage, everything will be normal. In fact, if there is sufficient left over to start the build, a mortgage where the stage payments are issued in arrears through the build process should suffice. Otherwise, one which allows you to draw down 75% of the land’s value as the first stage should be satisfactory.