Financing Your Build
Most self-build projects will cost more than originally anticipated, with few coming in under budget, but this doesn’t mean you lose money.
Almost every house featured in SelfBuild and Design magazine is worth more than the combined cost of plot and build, although this shouldn’t be taken for granted. It’s often difficult to be sure what’s actually included in the final build cost, and which items are omitted or conveniently forgotten.
Initial talks with a financial advisor and potential lenders should establish your borrowing potential, which will help you to set a budget.
It’s essential not to underestimate your costs and remember to add a healthy contingency of at least 15 per cent for those inevitable unforeseen expenses.
Some selfbuilders already have funds in place for their project, without the need to borrow. Downsizing is a popular way to become mortgage-free, which can prove an appealing incentive, particularly for retirement.
If you have to sell your existing home to fund your build you may need to rent temporary accommodation or move into a caravan on site to save money.
For renovation and extension projects, most lenders will only offer funding on properties which are already habitable, with a working bathroom and kitchen. Extending an existing mortgage to pay for an extension or for renovation work is one of the most popular ways to raise funds. Taking out a home improvement loan or personal loan is another option, and your finance needs will differ depending on whether you are improving your current home or buying a doer-upper.
Most selfbuilders will need to borrow money, usually taking on a mortgage through a bank or building society.
The biggest difference between self-build and standard residential mortgages is that funds are released in stages for a self-build rather than as a single lump sum.
This reduces the lender’s risk and ensures that the money is spent as planned, so you don’t run out part-way through the project.
Typical key stages for a self build may include:
- Purchasing land (usually with planning permission)
- Completion of the substructure
- Eaves height
- Roof finished and the building weathertight
- First fix
- Second fix
- Completion certificate.
These funding payments are made in arrears and released once the stage has been successfully completed and the work valued. This type of mortgage will require a deposit of between 15 and 25 per cent of the land cost, as well as funding for the early stages of the build.
A popular alternative is the advance stage payment mortgage where funding is available before each stage of the build, helping cashflow and avoiding expensive short-term borrowing. BuildStore’s Accelerator mortgage scheme facilitates borrowing of up to 95 per cent of land and build costs, with a relatively small deposit. The scheme is supported by a panel of lenders and releases stage payments in advance, enabling the borrower to continue living in their current home. To keep costs down, the mortgage offers interest-only payments, made on funds as they are drawn down.
Any mortgage application will be examined on its merits, so take the time to put together your facts and figures, including proof of salary and, ideally, outline planning permission, construction drawings and specifications, with an estimate of the total project cost.
Compile a list of questions for your lender, as each mortgage varies considerably.
Compile your own list of questions for your lender, as each mortgage varies considerably, and if you are buying a timber frame make sure that you will be able to pay for it when required (often up front). Confirm, too, that the long-term mortgage is suited to your needs and what the rate of interest will be.
The interest rate for a self-build mortgage should be a short-term outlay during the build, after which the option is available to either move to the lender’s lower traditional mortgage rate or switch to another provider.