Self Build Mortgages

Self-build mortgages offer stage payments to those who are interested in building their own property. This type of mortgage enables individuals to purchase a suitable plot and to receive regular financing for the building costs associated with this type of project.

Buying the Land

Self-build mortgages begin with the purchase of the land. This works in a very similar way to a standard investment mortgage, meaning that mortgage lenders will generally forward around 75 percent of the purchase price. One anomaly is that many lenders will lend 75 percent of the purchase price OR the value, whichever is lower. This is an interesting point and one that has been raised for a very good reason.

Many investors will purchase land on a speculative basis, i.e. without planning permission in the hope that planning permission can be obtained, at a later date. This approach, of course, presents a huge risk and the higher the chances of obtaining planning permission, the greater the purchase price is likely to be. Although the decision of risk versus cost is entirely up to the investor, it is important to recognise that the financing company may not have the same thoughts on the land and may, therefore, consider its value to be a lot less than the actual purchase price.

Self Build Mortgage Stage Payments

Lenders offer further mortgage finance as the build progresses, until the property is complete and the entire mortgage is taken. How stage payments are calculated varies between providers, but broadly they fall into two categories: advance or arrear.

With arrear payments, the financial institution inspects the property at the end of every stage and then, based on their own valuation, provides a mortgage to reflect the increased value of the property. This method has one major downside, namely that the builder will have to find the cash up front to pay for the build. However, as this method is less risky for the financial institution, it often offers more favourable rates.

In the case of forward payments, the cash is forwarded at the beginning of the relevant stage. This has obvious cash flow advantages, but will generally mean that the borrower is subjected to greater control in terms of what is being completed and when, as well as increased interest rates to reflect the greater risk taken by the lender.

Essentially in either case, at the end of the build the mortgage should be the same and should reflect the completed value of the property.

Self Build Mortgage Financing

A complex financing structure is one of the key issues that must be dealt with, when it comes to self-build projects and a obtaining self build mortgage. Traditional financing is not necessarily an option, with mortgage companies only being prepared to offer a mortgage on the property that actually exists – not that will exist in a few months’ time! For this reason, the level of financing available from a traditional mortgage provider would probably only cover the value of the land, not the building costs.

One option is to create a self build mortgage through using a combination of a traditional mortgage and loans. This involves obtaining a mortgage on the value of the plot of land and financing the build part of the project through separate loans. This approach has several advantages, the main one being that there is no need to conform to the stages that must be completed for a self-build mortgage. By paying for the build through an independent loan, it is possible to build according to your own schedule, without being obliged to comply with the requirements of a self-build mortgage.

On the downside, the cost of a loan is likely to be considerably higher than the cost of a mortgage. Consequently, the monthly payments will be significantly greater and budgets should be adjusted accordingly. 

Another issue is that an unsecured loan is typically offered on the basis of income. As an investor, this may prove problematic, particularly if the property is your sole business. The higher the level of risk that you pose to the lender, the higher your repayments and the less favourable this option becomes. Generally speaking, an investor with a reliable income from employment will have the option of obtaining a loan that offers flexibility, without blowing the budget.

Self Build Equity Release Mortgage

A variation on the above is the option of using equity release to produce the necessary cash to fund the actual build. The combination of a mortgage on the land and cash, either from savings or from equity release, often offers the best of both worlds in that you will have the flexibility of using cash for the development whilst using mortgage finance to purchase the actual plot.

Self-Build Mortgage

Despite the availability of other options, the vast majority of people choosing to self-build tend to utilise one of the many specialist mortgages that are now available, purely to deal with the unique situation of self-build. These types of mortgages are highly specialised and are dealt with in their own section.

Stage Payments

The defining feature of a self-build mortgage is that the finance is forwarded in stages, as the build progresses. Broadly speaking, there are two types of self-build mortgages available: those that provide you with finance at the end of the relevant build stage, and those that offer finance at the beginning of the relevant build stage. Either way, there are defined stages to the build which will have to be adhered to in order to remain on track with the self-build mortgage payments.

Typical Stages

Whether you have opted for the advance payment or arrear payment option, the stages are likely to be very similar and will depend on the type of property that you are building. Although every company works slightly differently, most will split the mortgage into six distinct phases.

With a brick and block building, the stages are usually as follows:

• purchase of land;
• foundations and initial architectural costs;
• achieving wall plate level;
• becoming water and wind tight;
• plastering throughout; and
• completion.

With a timber frame property the stages are the same except for the third stage which, instead of achieving wall plate level, involves the erection of the timber frame.

Valuation Issues

One of the ongoing issues that must be dealt with every time a stage payment is requested from the financial institution is the presentation of values and costs for the relevant stage. When selecting a self-build mortgage, it is vital that you consider the method used to value the various stages. With stage payments in arrear, it is slightly easier as the financial institution will value the work that has been completed and then forward the relevant percentage, which can be as little as 60 percent or as much as 95 percent.

With payments in advance, it is necessary to prove to the lender the anticipated costs of the build and the likely value that will be added to the plot by the planned works. Therefore, the payment in advance option, whilst being good for cash flow, is actually more intensive in terms of paperwork and business plans.

Self Build Considerations

As the main purpose of creating a self-build property is to design a home that will be either a dream home or, alternatively, a house that is easy to sell and which produces a healthy profit, design is crucial. Although having the freedom to design your own property offers great scope for creating a perfect house, this does leave an investor with a whole host of decisions that would not normally have to be made.

Certain key design rules should be adhered to when building a property solely for profit. It is absolutely vital that the design remains in keeping with the target market and that one’s personal preferences are put to one side. Trying to cram too many features into the property can also be a big mistake; clean and simple lines and features tend to work best for a new build and often expensive additions such as high tech television and sound systems are unlikely to increase the value of the property. 

When considering every addition, focus on exactly how much this extra is going to cost you and how it is likely to affect the final asking price; never get carried away. Building a property is not about cutting corners, but it is about making sound financial decisions and only spending money on worthwhile improvements and desirable features.

Insurance

Building a property is certainly not without risk. Insurance requirements will vary as the build develops and keeping on top of your needs will not only save you cash on unnecessary insurances but it will also ensure that you have the correct level of coverage. When you are purchasing a plot, your insurance requirements are relatively small and should cover the basic flood or fire risks. But, as the property is being built, insurance needs will change.

During the build itself, it is important to ensure that you have suitable insurance in case anyone working on your site is injured. If you employ a project manager and a main contractor, it is likely that they will provide their own insurance. Do not, however, leave this to chance; make sure that there is no comeback on you if there is a problem. 

It is also important to keep the structure insured, as it is being built; this may require regular changes to the policy. As a general rule, deal with the issue of insurance every time you discuss a stage payment with your financial institution. Remember to alter the level of insurance cover whenever a new stage is completed. 

Re-Sale of the Property

If your intention is to sell the property, at the end of the build, then make sure that you keep extremely clear and detailed records of all work completed and the various insurances and guarantees involved. Any buyer will be keen to see that all works have been completed to full specifications and may ask to see the plans as well as the relevant planning permission and regulations. By keeping these documents to hand, you are increasing your chance of achieving the maximum possible resale value.

Self Build Regulatory Issues

Building a property from scratch is bound by numerous regulatory issues. Regulation is essential to ensure that safety is maintained and that developments remain in keeping with the surrounding area. At every stage of building, you will have regulatory matters to deal with and overlooking these issues could be extremely costly in both time and cash.

Planning Permission

One of the first things that you have to deal with is planning permission. Planning permission is obtained either as outline or as full. Outline planning permission is simply tentative permission and suggests what could be obtained as full planning permission. Commonly, those selling land will obtain outline planning permission, beforehand, as this is a relatively quick process and does not require detailed plans. Once you have outline planning permission, you are in a position to make a full application with much more confidence, based on the outline plans, provided you are not too ambitious. For example, if the outline planning is for a three bedroom bungalow, submitting a full application for a five bedroom house is unlikely to be successful.

Full planning permission will require detailed plans that are drawn to scale. Generally, it is essential to seek the assistance of a specialist architect who not only understands the ramifications of property design, but is also aware of local planning restraints. Planning permission requires that building starts within five years of permission being granted. After five years, the permission becomes lapsed and a new application has to be submitted. 

Building Regulations

Building regulations are an entirely separate issue to planning permission and must be obtained even on projects that do not require planning permission. Building regulations are administered by the local council and permission is granted to the property owner once the build has been completed and inspected. The inspection process is purely to determine whether the build has been carried out safely and in accordance with current guidelines. Many builders deal with the issue of building regulations as part of their role, but make sure that someone arranges for the inspections at the appropriate times. If you delay requesting an inspection, you may find that part of the construction work has to be removed to allow access, thus wasting time and money.

New Build Guarantees

It is possible to purchase a guarantee that covers the structure of the property. Almost every developer will provide a 10-year guarantee and it is generally assumed that a new build property will come with such a guarantee. Therefore, a suitable insurance policy should be obtained as soon as the property is complete to ensure that you have the best possible chance of selling the property.

Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.