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A guide to self-build mortgages

by Narinder Gill on 8th September 2022

Self-build mortgage

Self-build mortgages are becoming more and more popular. Finding the perfect home can be a long hard search for many people, so it is not surprising that some decide to build one themselves!

You can find out more about self-build mortgages on our services page!

Arranging to fund such a project and getting a self-build mortgage on what might be just a plot of land, is just one of the many steps self-builders will need to sort out (and early on too).

In this guide, we will look at why self-build mortgages are different, what kind of lenders offer them, what you will need to prepare to get one, and what options you may have once the build is done.

Why are self-build mortgages different from ‘normal’ mortgages?

Normal mortgages are secured on a habitable property that is either on its own land (freehold) or within a building such as a flat/apartment (leasehold). For a self-build project, people either buy the land or buy land with a property that they intend on demolishing before they build their new home.

Either way, normal mortgages are not set up to cope with the risk associated with a building project where there is no property for someone to live in. Normal mortgages have terms and conditions in place preventing someone from obtaining a normal mortgage to buy just land or knock an existing property down. There are several lenders out there, often not the big banks, who have created mortgage products and criteria specially designed to match the many needs of a self-build project.

What kind of lenders offer them?

The main lenders in the UK sometimes have self-build mortgage products but they are rarely set up to match the needs of many projects. Specialist lenders such as building societies and some private banks have far more experience in this area and have been helping people with their projects for many years. These lenders tend not to advertise very much but offer their products through brokers.

What kind of features do self-build mortgage products have?

Lenders who have experience financing self-build projects have all sorts of ways to help, depending on how the project is to be set up. Nearly all lenders will assess what the future value of the property will be when it is finally built but they will not lend all the money in one go based on that figure. The risk that the project may fail is too great to lend an amount based on a value that simply doesn’t exist at outset. That said, they will lend money at the agreed stages of the project. Those stages are usually: –

Stage 1 Purchase of land
Stage 2 Preliminary costs & foundations
Stage 3 Wall plate level
Stage 4 Wind & Watertight
Stage 5 First fix & plastering
Stage 6 Second fix to completion

Self-build lenders will also want to know that you have a project manager in place or experience in building properties yourself. They will want to know who the builders will be and who the architect is. They will also want to know about any professional indemnity in place and that you will be getting a recognised warranty in place once the property is completed.

Then there are the ways to receive the money at the above stages. Some lenders pay in advance for the next stage and some release funds after each stage is completed. Which you go for will depend on various aspects of the project. There are other features of self-build mortgage products that may or may not be extremely helpful to your project so we recommend talking to a professional specialist finance broker with experience in this sector. They will know the options and talk you through them to see which will be the most beneficial to you and your dream project.

What will you need to prepare to get a self-build mortgage?

As with normal residential mortgages, the amount you are able to borrow is based on your income and ability to afford monthly repayments, it is, therefore, vital to establish how much you can borrow. This could mean you are potentially able to borrow more than expected and build a larger property, however, the reverse of this is also true. Obtaining an agreement in principle from a lender could also help with your negotiations for a plot of land or property you intend to demolish and replace.

Planning permissions will need to be evidenced. Confirm if the plot or property has full planning permission or outline permission. Applications can be processed with outline planning however full planning is often required prior to being able to complete the purchase.

The proposed construction method of the property you’ll be building. Nowadays there are many methods of construction with more being added that are eco-friendly and energy efficient. Your broker needs to know what method of construction you will be using to then look for appropriate lenders who are accepting of your choices.

Many a building project has gone over budget (as seen on TV). Check with your building contractor that the expected build costs are reasonable and realistic. Things won’t always go to plan and we recommend having a contingency fund available. All lenders will want to see a detailed schedule of costs and works.

A few final points to consider…

It is important to ensure you have a contingency fund, which ideally, will be at least 10% of the total project costs. Even the most well-planned project can experience unexpected costs and this fund is there for exactly this reason.

Lenders will ask where you will be living during the build and factor in any rental costs when assessing your affordability.

If you are working to a specific build contract, with the contractor, making significant changes to the property “mid build” can be costly so ensure, where possible, that you won’t need to make any before work commences.

Beware of budget “creep”!

It can be very easy to upgrade specifications during the build e.g. tiles, kitchen work tops, floor coverings and while individual changes may not seem costly a series of these can become a significant sum. The old adage – look after the pennies and the pounds will look after themselves – Is never truer than on a building project.

What happens when the build is complete?

Given the level of risk a lender is taking on with a self-build mortgage, the interest rate and fees tend to be a little higher than for normal mortgages on properties already built. Therefore, many borrowers will want to exit a self-build mortgage finance agreement as soon as possible to reduce their costs. That isn’t always easy given the property is brand new and sometimes so unique it can be difficult to value. As the property is being occupied for the first time upon its creation, it will be treated as a ‘new build’ by many normal lenders. This means they will want to know a bit about the journey you went through to build it. They will want evidence it has fully passed any local authority building regulation checks, and that there is a 10-year approved warranty in place.

How can a professional mortgage adviser help?

At Coreco Specialist Finance we have extensive experience in all kinds of unusual mortgage finance. This means we guide our clients through the whole finance process, making them aware of what they need to consider and arrange from the outset to completion and beyond.

For more information give us a call 020 7220 5100.

 

Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it. A percentage of the mortgage amount may be charged depending on individual circumstances. A typical fee is 1%.

Written by Narinder Gill

Associate Specialist Broker

Narinder is an Associate within the Commercial Team at Coreco Specialist Finance. He assists HNW and UHNW clients with their large portfolio and complex lending requirements. He specialises in complex/portfolio Buy to Let mortgages (including Ltd Co/SPV), HMO’s and Bridging finance. Narinder also advises on all Commercial, Semi-Commercial, and Development finance. The ‘go to’ Broker for the more technically challenged lending requirements, frequently providing bespoke/structured lending solutions. After graduating from the University of Kent with a LLB (Hons) in Law and College of Law (LPC) Narinder joined The Law Society & Royal Courts of Justice in London. After working in the legal sector Narinder pursued a career as a Mortgage Broker and quickly became CeMAP qualified. Prior to joining Coreco Specialist Finance, Narinder was a Senior Broker at Mortgages for Business and Countrywide Mortgage services where he assisted in Residential, Specialist BTL & Commercial Finance. Narinder is a member of the London Institute of Banking & Finance. Outside of work, Narinder is an avid golfer having captained his University and Club Scratch team and competes in County tournaments.

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