Raising Finance for your Self-Build Project

13 February 2018 Mark Day, Self Build Consultant

Typically, people who opt to self-build their home tend to save somewhere between ten and thirty per cent of the full cost of the project compared to what it would cost to buy the same house from a developer. Of course, most self-builders do not want developer style homes, but it’s a useful comparison to get an idea of how much is saved on materials, labour, developer markup, and so on.

Simply put, cost usually isn’t the primary reason people decide to build their own homes, but it is a key benefit. Regardless of the savings made, building your own home is still a significant investment. It can be financed through a number of routes, from a mortgage for building a home, through to re-arranging private finances, pensions, remortgaging and so on. Here, we look at the best strategies for financing your self-build project.

How Do Self-Build Mortgages Work?

house of money
Most people purchase regular homes with the help of a mortgage — it’s exactly the same for self-builders. However, a key difference is that most of the big high street mortgage providers won’t be able to help you with a mortgage for a self-build project.

This is because of the complexities involved in a self-build mortgage. For instance, you tend to need to borrow money in two phases. The first phase finances the initial land purchase, and the second allows you to borrow the money to actually construct the house on that land.

The second phase of most self-build mortgages tends to be released in stages — money is released for laying foundations, then once the roof is on you may have a further release of capital, and so on. With all of this in mind, it’s easy to see that the level of administration, intervention and sheer knowledge required to deliver a self-build mortgage is enough to put high street lenders off.

These factors mean it simply isn’t worth high street banks and building societies setting up the systems to handle self-build mortgages, considering the relatively low numbers of people self-building in the UK.

Luckily, however, there are many lenders who do issue this type of mortgage. It’s likely that these self-build mortgage providers are smaller than the lenders you might go to for a standard mortgage, and traditionally it’s a building society rather than a regular bank that will lend for this type of project. Typically, these organisations are willing to lend between 75 and 90 per cent of the purchase price of the land, and 75 to 90 per cent of the projected build cost.

There are caveats, however. The plot will need to have planning permission, and you’ll need a proper projected cost breakdown for the build cost tranche. All of this will be subject to the usual valuations that you would expect in the process of getting any mortgage.

As previously mentioned, some building societies release their build cost finance in stages once you have completed the initial land purchase stage. This may lead to cash flow problems, particularly for those working with timber frame suppliers who require upfront payment.

Some specialist self-build mortgage brokers, however, will allow you to access “advance” funding, which releases stage payments before the work commences. This makes things much easier for those looking to build quickly or to build much of the structure at once. One example of a mortgage broker that will allow for such an arrangement is BuildStore.

An important point to note for prospective self-builders is that interest rates for self-build mortgages tend to be one to three percentage points higher than you might expect of a high street mortgage for a standard residential property. However, almost all self-builders tend to remortgage with a regular high street mortgage once the project has been completed, so the impact is usually negligible.

Are You Able to Remortgage Your Existing Home to Pay for a Self-Build Project?

There are two factors that lenders consider above all else when deciding whether your existing home can be remortgaged. First, you must have enough equity in your property. Second, it must be believed that you are able to service a new mortgage — i.e. is your income sufficient, and does the lender believe that you can continue making repayments all the way through to the end of the contract. If you are able to satisfy these two criteria, remortgaging your existing house is a comfortable and very simple way to raise the money to build your new home. 

This does not apply to everybody’s situation, but releasing equity if you are able to means you don’t have to sell your home first in order to free up capital to get started. Speak to your existing lender about your unique circumstances, as this can be an easier way to get started on a self-build project you’ve been considering but haven’t yet worked out the financial implications.

Are You Able to Obtain Short-Term Lending or Funding from Anywhere?

Many developers use short-term funding to finance the purchase of run-down houses and plots, particularly at auctions, where the 28-day hammer-to-completion timescale usually beats the regular lenders.

There are ways of using such short-term funding to get your self-build project up and running. If you are looking to purchase land and then re-evaluate, for example, this may be the logical route to take. It all depends on the circumstance. If the perfect plot appears out of nowhere it is good to have options.

Specialist auction finance companies operate so-called bridging loans, which are purposely designed to fill the gap between purchase and the ability to convert to a mainstream mortgage. These are designed to be short-term loans, and with good reason — typical interest charges average around one per cent per month, but clearly lending criteria are more liberal. If you are considering this kind of funding stream be sure to shop around extensively.

Can You Privately Fund Your Self-Build Project?

You may already have the funds to purchase a plot and build your own home — perhaps through inheritance. But you also might not know that you have enough funding to realise your self-build dreams. Could you sell off part of your garden as a building plot to raise cash in the short-term, for example?

Self-builders come to all sorts of different arrangements to finance their projects, such as buying a plot big enough for two houses and then gifting one to a builder in return for construction work on your new home.

Also, with the relaxation of pension rules, you are now able to draw down your pension fund after the age of fifty. In theory, there’s no reason you couldn’t use this to fund the construction of a new, highly energy efficient, cheap to run home to retire in.

As with all big decisions like this, it is best to take independent financial advice from someone who understands your individual financial circumstances. Detailed research pays off, and having someone on your side who knows the pitfalls to any funding stream always proves to be invaluable.

What Are the Hidden Costs of Building Your Own Home?

As any self-builder will tell you, you need to bring a fair amount of cash into a self-build project, even if it is primarily funded through a self-build mortgage. There are a number of “hidden” costs that vary with each project, but can typically include costs that either need financing before lending is secured or are not mortgageable. Here are four costs that you might not expect to pay, or may not know the cost of going into your first self-build project.

Design Fees

If your intention is to use a professional designer to create your dream home, they will typically charge anything between £5,000 and £20,000. Package suppliers, such as Potton, don’t charge significant upfront fees for using their in-house designers but do tend to require some early, up-front commitment.

Planning and Regulatory Fees

Your planning application might need to include surveys — if you have special ecological conditions on the site, for instance — and these can typically cost £500 to £2,000 each. Additionally, the planning application itself will need a fee to be paid. You’ll also need to comply with Building Regulations. While fees for this vary between local authorities and private approved inspectors, it typically costs £800 to £1,200 for most self-build projects.

Insurances

Insuring the project against everything from theft of materials to public liability is critically important considering the scale of your investment. Typically, this costs around 1% of the project total. Lenders will also require you to have a structural warranty on the finished build, in addition to meeting building regulations. This will cost you, again, around 1% of the total project cost.

Deposits

Finally, don’t forget the cost of your deposit. Mortgages often only cover around 85% of the land and 85% of the build costs. Although this percentage can vary slightly, you will need to cover some of the costs upfront from your own pocket. You’ll need to find this remaining 15% or so from savings or equity in your existing house.

Potton

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