Self Build

Building and living in your own home must be the ultimate dream for everyone. How do we go about fulfilling this dream?

A self build mortgage allows you to build your own home. Typically, the lender will lend you up to 75% of the land and build cost. The mortgage is released in stages once a key milestone of the build has been reached. How much they lend you is based solely on your income and affordability and is no different from a conventional mortgage.

The key stages in a self build project are:

No Typical Build Stages
1 Purchase of Land
2 Foundation Level
3 Wall Plate Level
4 Roof Level
5 Completion

The following represents a typical example of how a self build mortgage could be structured:

You have seen a plot of land with detailed planning permission (DPP) to build a four bedroom detached house. The cost of the plot of land is £200,000.

A colleague has recommended a quality builder and they have confirmed a build cost of £200,000.

Plot of land: £200,000

Build Cost: £200,000

Total land & build cost: £400,000

The lender will lend you up to 75% of the total build cost = £300,000

Your deposit or contribution to the total build cost:  £100,000 (25%)

The lender will release the £300,000 in five stage payments. For example:

No Typical Build Stages Cost Stage payments
1 Purchase of Land £200,000 £150,000 (75%)
2 Foundation Level £37,500
3 Wall Plate Level £37,500
4 Roof Level £37,500
5 Completion £37,500
Total £400,000 £300,000

The number and stage types differs between lenders.

A surveyor will be instructed by the bank to confirm the value of the land and the end value of your proposed development (gross development value or GDV). At every stage of the development, the surveyor will be sent out to check that each stage has been completed to a satisfactory standard and confirm the current value of the build as it progresses. You will have to cover the cost of the re-inspection by the surveyor. Some lenders will request for an architect certificate to be issued at every stage of the build before they release the next payment.

Arrears payment or Advance payment

There are two ways the lender releases the payments: arrears based payments or advance payments.  In arrears based payments, the lender releases the money at the completion of each stage of the build. As such, you will need to cash flow each build stage yourself. For example, once you’ve built the foundation level from your own resources, the lender will instruct a surveyor to inspect it. Once it’s signed off as satisfactory, the lender releases the payment. So in effect, you’re getting paid at the end of each stage. With the advance stage payments, the lender releases the money at the beginning of each stage, therefore making it easier for you to cash flow each stage of the build if you are working to a tight budget.

Build and then refinance

The majority of lenders have a single standard self build product (e.g., Standard Variable rate + 1%). The rates are more expensive than conventional mortgages due to the risk associated with Self Build projects. The rate will last for the duration of the build and on completion you roll over to a standard residential product. Early redemption penalties (if applicable) are waived when switching to a standard residential product with the same lender.

For example: plot of land is £200,000 and build cost is £200,000.

Total cost of land and build is £400,000.

The property will be worth £700,000 on completion (i.e. Gross Development Value (GDV)).

You obtain a self build mortgage of £300,000 (75% LTV) from Lender ABC.

You’re offered a self build product of 5.5% over a term of 20 year on capital and interest.

As such, monthly payment = £2,064.

On completion of the build (in 18 months time) you will have access to their standard mortgage products. As such, you decide to proceed on a 2 year fixed rate of 2.19% with Lender ABC.

Gross Development Value: £700,000, with an outstanding mortgage of £300,000 (43% LTV).

Therefore, monthly cost over 18 years = £1682.

Lender waives the ERC as switching to their standard residential products.

During the build stage, your mortgage costs are higher and the lender will assess your overall affordability on the self build rate. But once you’ve finished building your home, you invariably refinance onto a standard mortgage product and potentially secure a decent rate as a result of the reduced loan to value.

Some lenders insist on the self build rate being paid on capital and interest. This does not make sense considering you’re going to refinance in 12 – 24 months time. The capital you would have repaid during this period is miniscule.

Using the above example, the monthly cost on a mortgage of £200,000 at 5.5% on interest only would be £1375, a saving of £689 per month and a great help for cash flow purposes during a possibly challenging 12- 24 month construction phase. It makes sense to allow you to do interest only during the construction phase and then on completion, automatically proceed on a capital and interest mortgage going forward.

When analysing self build mortgage products, the key ingredient is flexibility.

Flexibility means no early redemption charges (ERC). Mortgage products have early redemption charges; if you decide to repay your mortgage early, you’ll have to pay a penalty (typically 1% to 3% of the loan amount). Because you are going to refinance at the end of your build, you want the flexibility to refinance without incurring a penalty. Decent providers will waive the fee if refinancing to their standard residential mortgages. However, you need to be cognitive of their standard residential products meeting your overall mortgage objectives post completion.

For example, your preference could be for a 5 year fixed rate because you are of the opinion that the interest rate will increase within the next two years. Lender ABC offers you a 5.5% self build product, but they don’t have any decent 5 year fixed rate products. However, the 5.5% has no early redemption charges so you are free to shop around to secure the best 5 year fixed rate on the market, based on your requirements, and you are not locked in with your self build lender with rates that don’t meet your long term objectives.

A final point on flexibility is that any self build product that offers you an interest only payment option during the build stages is a big plus. This will help in reducing your expenses and improve cash flow during the construction phase. On completion, you will be expected to refinance on a full repayment mortgage.

The 3 Big Action Points for Self Builds Borrowers

Build your Dream Team first: When building your dream home, your focus is to ensure that your new home is built on time, to exact design specifications, and on budget. A challenging task on its own, therefore, you need to build a quality dream team to support you going forward. The key members of your dream team are: Independent self build Mortgage Specialist, Solicitor, RIBA qualified Architect, and NHBC registered Builder/Contractor.

Self Build

In relation to the mortgage, there are quite a number of niche lenders in this space, all offering a wide variety of options for self build borrowers.

Because it’s a specialist area, the best route to market is via an experienced independent mortgage broker. Without doubt, the king of the jungle in this area is buildstore, whole of market mortgage brokers specialising in self build, conversion, and renovations. They have knowledge of all the self build deals currently available in the UK. The real edge is PlotSearch, their database of available land for sale opportunities across the UK. It’s a great place to start if you’re looking to buy land and secure prerequisite finance to build your dream home.

Fall in love with the numbers FIRST and build your dream home second!

The first thing you need to work out is how much you can actually borrow based on your income.  As a rule of thumb, four times your basic income plus your deposit represents your total project cost. Alternatively, speak to our self build mortgage specialist.

If you are currently a home-owner and need to sell in order to build your new home, then where are you going to live whilst your new home is being built? Will you be renting, living with family, or living on site in a caravan? If renting, what will be your monthly rent, as it will be factored into your affordability to determine if you can afford your rent and the self build mortgage?Use a rate of 5% to work out your mortgage cost.

For example: If your gross income is £50,000 x 4 = £200,000 x 5% (capital and interest) over 20 years = £1320 plus monthly rent of £1500 = £2820 pm. Is this affordable? It may be affordable to you, but the lender’s affordability criteria are more stringent.

If you’re renting a caravan, what’s the monthly hire cost of the caravan?

You may decide to reside in your current home whilst the new property is being built and then sell after your home is completed. If you have an existing mortgage on your current home, can you afford to service your existing mortgage and your self build mortgage?

A lot of deals struggle at this stage because they fail the lender’s affordability test, especially for those retaining their existing mortgage or renting during the build.

In relation to mortgage costs, your mortgage adviser will provide a breakdown of the lenders costs: product/arrangement fees, valuation fees, re-inspection costs, broker fees, and remortgage costs. In addition, don’t forget to get a quote from your solicitor regarding the legal fees and stamp duty costs (stamp duty is paid on the land) that will be required. If you happen to be selling your property, then your solicitor could perhaps do a deal for handling both transactions. Don’t forget to obtain insurance quotes!

Assuming you’ve passed this stage and affordability going forward is not an issue, the next set of figures you need to fully grasp are your build costs. It’s not uncommon for build costs to go over budget, especially if some unforeseen event pops up that requires additional funds to complete the build. Once again, I suggest you consult with a qualified architect to provide a breakdown of your build costs: planning and building regulations, site plans, architectural drawings, site surveys, architectural fees, builders costs, re-inspection fees, insurances, equipment, cost of materials, labour, project management costs, etc.

It goes without saying that you will be advised to have a contingency fund in place (typically 10% to 15% of the build cost), and you need to obtain at least three quotes from recommended quality builders to ensure your getting value for money.

You should end up with a spreadsheet detailing every single item of expenditure. It’s got to be done.

Documentation and planning approval: In addition to the provision of payslips, bank statements, trading accounts, and proof of deposit, the lender will need to see that you have obtained all the prerequisite planning permissions and building regulations. A schedule of works, project delivery timetable, and builders quote will also need to be sent to the lender. Some lenders will require DPP (as opposed to an OPP) before funds can be released. OPP (outline planning permission) is where approval has been granted for some sort of dwelling whilst DPP (detailed planning permission) is where approval has been granted for a specific type of dwelling. Self build mortgages take longer to offer (to get formally approved) compared to traditional mortgage applications because of the extra documents that need to be checked.

The main reasons for the considerable delays in mortgage applications being processed are because the underwriter has not been supplied with all the information at the outset, and as a result they cannot progress the application to approval stage. As such, it’s in your own interest to ensure you supply all the information in one go: Fully Packaged Application.

Sending documents to a lender in a drip feed fashion is a complete waste of everyone’s time. A fully packaged application will ensure that your mortgage is approved as quickly as possible, allowing you to commence the construction of your dream home in earnest.

I hope this information is useful. Good luck with building your new home and if you decide to take the plunge, we would love to talk to you. So please get in touch:info@mortgageintellectual.com

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

 

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