For some, savings will provide sufficient funds to carry out the projects discussed. However, for many self builders and renovators, using a combination of savings and borrowed finance is the way forward.
Fortunately, if you need to borrow money, there are specialist mortgage products available.
Stage Release Mortgages
A mortgage for a self build, custom build, renovation or conversion project is tailored towards the way you ‘pay’ for your finished project. Funding is released at key, identifiable stages during the construction, rather than all at once on completion day. As a result you typically need a specialist and experienced mortgage provider.
Some lending institutions lend on the land purchase or existing property and at key stages during and on completion of the build project.
This can vary from:
- 75-90% of the purchase price or valuation (whichever of the two is the lower)
- up to 80-90% of build costs
- up to 75% of the growth in value of your project at key stages during construction.
Some lending institutions do not lend on land, but they will lend during the build period.
Products available include:
- discount from standard variable rate of interest
- fixed rate of interest
- bank base rate tracker
Rates of interest are higher than standard house purchase/re-mortgage rates of interest and vary from 4-6.5% per annum. The arrangement fees also vary from lender to lender. You may be tied into the lender for between one and three years, again lender and product dependent.
Once the property is habitable and this has been confirmed by a RICS’ qualified surveyor and issue of the Building Control completion certificate, some lenders permit the borrower to ‘switch’ to a lower rate of interest during the ‘tie-in period’ without incurring penalty interest.
- Do bear in mind that consultant and/or broker fees vary.
- Beware, too, of ‘hidden’ fees that you only become aware of at a later stage of the build.
- Land (with the minimum of outline planning consent)
- Wallplate/eaves height (just before the roof trusses go on)
- Wind and watertight roof tiled
- First fix
- Second fix
- Certified completion
Renovation or Conversion
- Purchase of existing structure
- Inspected completion of structural survey and cost estimate of necessary works
- Completion of load bearing elements
- First fix
- Second fix
- Certified completion
Custom Build or Group Self Build
- Purchase of land
- Associated preliminary costs and substructure
- Construction to wind and watertight stage
- First fix
- Second fix and completion
What to Consider Before Applying for Your Self Build Mortgage
Are you intending to live in your current home, rented accommodation, a caravan on site, or perhaps live with family?
Your answer is very important — where you intend to live while you build will have an impact on your affordability to borrow monies to build your dream home. For instance, the monthly rental payments or mortgage payments will have an impact on your affordability calculation.
Some lenders will accept you making upfront rental payments, which will not have an impact on your monthly income versus expenditure.
Your Method of Construction
Some lending institutions will not lend on certain types of construction, so do ensure you check with them. Of course, all your design and construction methods will need to be compliant with the current Building Regulations.
Each lender’s criteria are different, but you do need to ensure they are aware of your build type and of the payment terms and conditions your supplier has stipulated.
Do not agree any payment schedule with your builder or suppliers until you know how your lender will release funds to you.
Your Build Cost
Some lenders require that you must work to a fixed build cost budget; others may request that a qualified quantity surveyor provides the information on the build costs. Check with your lender what they require. Also, ensure that you include a minimum of a 20% contingency built into your build cost estimate.
In addition, as part of your full project costs and budget control estimate that you provide your lender with, you’ll need to identify (or at the very least estimate) the following costs:
- Land purchase and associated fees
- Project management, including health and safety compliance
- Gaining planning consent, if not already achieved, and associated fees
- Demolition and/or site preparation
- Construction design fees
- Construction costs (preferably estimated against Building Regulations drawings).
You must demonstrate to the lender that you will have sufficient funding ability and competence in place to complete the project.
How Much Can you Borrow?
As a guide to help you gauge your potential borrowing facility, the income multiplier may be:
- Single application: up to 4.5 times the single income.
- Joint mortgage application: up to 4.5 times the highest salary, plus second applicant’s salary, or 3.5 times joint income.
This is purely a guide, and I prefer to work on the basis of up to four times single income, and up to three times joint income. Banks and building societies apply their own affordability calculation to assess your borrowing limits.
You also need to check your own affordability. Would your net monthly disposable income enable you to borrow funds based on a stress test rate of interest of up to 7.5% on a capital and interest basis (repayment)?
- A mortgage will not be granted if it is deemed not to be affordable.
Are Self Build Mortgages More Expensive?
In effect a self build mortgage is exactly that, the only difference is the fact that funding is released at key, identifiable stages during the construction project and in most instances funds are also released to assist with land/existing structure purchase.
Rates of interest are higher than standard house purchase/remortgage rates of interest and vary from 3.75% to 6.5% per annum; the arrangement fees also vary from lender to lender. Bridging facilities are more expensive ranging from 0.59% to 1.5% per month and the arrangement fees can be quite high; between 1% and 2% of the total borrowing facility. This can be with or without incurring exit fees. You may be tied into the lender for between one and three years, again lender and product dependant.
Once the property is habitable and this has been confirmed by a RICS’s qualified surveyor; building control have issued a Completion Certificate, at that point lenders may then permit the borrower to ‘switch’ to a lower rate of interest during the ‘Tie in Period’ without incurring penalty interest.
Also check your own affordability: Would your net monthly disposable income enable you to borrow funds based on a stress test rate of interest of up to 7.5% on a Capital and Interest Basis (Repayment)? A mortgage will not be granted if it is deemed to be unaffordable or irresponsible lending!
Are Self Build Mortgages Regulated?
Mortgages of this type are regulated by the Financial Conduct Authority.
Applying for a Stage Release Mortgage
Supporting documentation required is basically the same as a ‘standard’ mortgage. After all, stage release residential funding is a mortgage from day one, except that funds are released in stages.
Additional supporting documentation required will typically include:
- Copy of planning permission
- Copy of construction drawings and specifications
- Copy of total project cost estimate (where possible, fixed-price contracts)
- Copy of Building Regulations approval
- Copy of site insurance and structural warranty
- Architect’s professional indemnity cover (if required)
- SAP calculation (this will be in the Building Regulations package)
- Experian credit report.
An initial valuation will be carried out to establish current value and anticipated end value, too. You will be required to pay the valuation fees. Interim and final valuations will also be requested and carried out by a RICS valuer.
The reports will be presented to the lender to evidence the increase of the interim value(s) prior to interim and final release of funds from the lender. Again, you, the client, will pay the valuation fees.
- A typical timescale for processing a stage release mortgage is up to three months.
- Consultants, brokers, banks and building societies will carry out a ‘forensic’ analysis of all supporting documents.
- In particular, they will focus on income and expenditure cross checked with the bank statements.
Types of Stage Release Mortgages
There are two main types of stage release mortgage:
- Arrears stage payment mortgages see funds released in arrears of work being completed.
- Advance stage payment mortgages allow payments to be made before stages are commenced. These mortgages, developed by specialist self build mortgage brokers, assists cash flow to meet payment terms of suppliers if sufficient liquid cash or suitable assets are not available.
In this current economic climate, it is becoming more difficult to have funding in advance of each of the stages of your build project. However, providing you are upfront and discuss your funding with your suppliers and other contributors they are generally willing to negotiate payment terms with you.
To provide additional security, in some instances, a lender may take a charge on your existing property. This may facilitate funding in advance.
If you already own the land or existing structure and it is unencumbered (in other words, there is no loan secured against it), the lender may secure funds against the land or existing property title.
Disadvantages of Advance Stage Payment Mortgages
- The cost of borrowing is generally higher than other arrangements due to the level of ‘risk’
- Only a very few lenders offer this facility too, so there is limited access to lender products.
- Currently advance funding may only be secured on a Single Premium Policy, which provides additional security to the lender. The cost of this premium is high.
- Ten per cent of total borrowing will be retained until Building Control has issued a completion certificate.
- Remember to take this into account when addressing ‘cash flow’ during and on conclusion of the build project.
Have an open dialogue with all of your contributors to ensure the lender’s stage release funding model is compatible with their payment terms. Cash flow management is critical.
Where can you get a Self Build Mortgage?
Some high street banks offer self build mortgages but there are many companies who specialise in mortgages for this type of project.
See a list of the latest self build mortgages and deals.
Site Insurance and Structural Warranties
A bank or building society will not release initial funds until you can demonstrate that you have adequate site insurance and a 10-year structural warranty policy.
Such policies are offered by providers such as:
- Q Assure Build
- Self Build Zone
- NHBC Solo
- Premier Guarantee
In my opinion, anyone undertaking a build project, whether borrowing or not, should have both in place prior to starting work on site.
Subject to affordability, banks and building societies are keen to lend on residential construction projects, providing you have carried out due diligence and engaged the appropriate team(s) to achieve the successful construction of your new home.