If you are considering a self-build project, there are a number of ways you could finance it.
How to finance a self-build
These include:
- Cash
- Raising funds by selling your existing home
- Remortgaging your existing home
- A custom build mortgage
- Bridge finance (if you are selling a property which holds enough equity)
- A self-build mortgage
What’s the difference between a standard mortgage and a self-build mortgage?
A self-build mortgage enables you to build your ideal home without needing 100% of the capital yourself up front. Rates of interest on a self-build mortgage are typically higher. This is due to the higher risk associated with building a home from scratch and arrangement fees vary from lender to lender. Some lenders consider mortgages for self-builds to cover land purchases (with planning permission), buying a property to renovate as well as barn conversions.
The biggest difference between a self-build mortgage and a standard mortgage is that funds are given to you at stages of the build, rather than a single lump sum. This reduces the lender’s risk and ensures that you don’t run out of funds when you are only half-way through the project.
Stages range from initial digging of the foundations to the final fix. At each stage the value of the build increases. The right funds need to be available at every stage to pay for materials, tradespeople and specialist services.
The amount released at each stage is subject to the lender receiving a satisfactory valuation. The amount you receive may be less than what is detailed in the cashflow forecast. The lender needs to see stage certificates or a letter from a suitably qualified architect or structural engineer or from the structural warranty provider confirming the stage has been completed to a satisfactory level. A lender re-inspection will be required at each stage.
A lender will normally allow you to repay the stage payments on an interest only basis during the build process and then convert to repayment once the build is complete and final funds released.
Two types of ‘stage payment’ self-build mortgage
There are two types of stage payment mortgage – in arrears, which is offered by the majority of self-build lenders. This is where you receive each stage payment after the stage has been completed. The other is in advance, where you receive each payment before the stage is commenced. This is riskier for the lender so is usually more expensive.
What do I need to do before applying for a self-build mortgage?
- Arrange for a mortgage in principle
- Find potential plots
- Assess development potential
- Arrange a valuation of the plot
- Arrange a site survey
- Purchase site
- Arrange site insurance – specialist self-build, renovation or extension insurance.
Are self-build mortgages really hard to get?
According to Chris Miller, Financial Adviser at CRS Consultants, “self-build mortgages are not hard to get, so long as you carefully prepare all your supporting documentation to assist your adviser and lender, this will also save time with the case processing.”
What criteria are self-build mortgage lenders looking for?
- Minimum age 18 and maximum age 80 at the end of the loan
- If you are going to be over 70 at the end of the term, evidence of pension income is required so the underwriter can take into account the likely impact of retirement on affordability
- You have to sign a declaration stating what age you intend to retire
- Your nationality and residency history will be noted
- You must have a minimum of three years residency in the UK and permanent rights to live and work here
- Evidence of the land (such as brochure, architects drawings, planning development etc)
- Usually standard construction materials (non-standard can be considered if it’s BOPAS accredited)
- Your self-build must have a suitable warranty or be architect or professional consultant supervised, for example by:
- Royal Institution of Chartered Surveyors
- Institution of Structural Engineers
- Chartered Institute of Building
- Architecture and Surveying Institute
- Chartered Association of Building Engineers
- Chartered Institute of Architectural Technologists (formally British Institute of Architectural Technologists) (MCIAT)
- An architect registered with the Architects Registration Board (ARB). An architect must be registered with the Architects Registration Board, even if also a member of another institution, for example the Royal Institute of British Architects, or the Institution of Civil Engineers
- The buildings insurance certificate will need a minimum of ten years.
N.B: The above member/s can be fellow or membership of these institutions.
Guarantee schemes which are acceptable with most self-build lenders:-
- Building Life Plan
- Build-Zone
- LABC
- NHBC
- Premier Guarantee
- FMB’s “Build Assure”
- ICW
What documentation do I need to supply to support a self-build mortgage application?
- Confirmation that you are paid in sterling (GBP) and hold a UK bank account
- You must have been continually employed for at least 12 months on a permanent contract. Applicant/s who are in a probationary period are acceptable subject to 12 months continuous employment and remaining in a similar role
- If you have a pay rise pending, this may be acceptable, subject to written confirmation from your employer that this has taken place prior to the mortgage completion
- Income from a second job may be considered
- Fixed Term Contract – Current contract for a minimum of 12 months may be considered
- Self-employed (you must have been self-employed for a minimum of 1-2 years (depending on individual lenders’ criteria)
- Your verification name, address, etc (Passport, Driving Licence, Utility Bill)
- Self-employed – latest two years Audited / Certified Accounts or Accountants reference or latest two years tax calculations and two years tax overviews
- Directors – where you have a shareholding of 25% or more, the criteria for Self-Employed will apply
- Maintenance Payments – A maximum of 25% in respect of payments made to the applicant under a Court Order
- Retirement Income – proof of state and private pensions (statements, P60 and any other evidence to support pension income)
- Six months bank statements
- Experian credit report.
What information do I need to supply about the self-build project?
- A full size copy of plans – floor plans and elevations
- Full details and evidence of funds you are contributing to the project costs
- Full name, address, qualifications and a copy of your Architects PI cover; or details of your Structural Warranty Provider
- If you are renovating a listed building, evidence that the builder or contractor has experience in listed renovations
- Copy of your planning permission
- Project Costings (including name, contact details of person completing and date)
- Your Asset & Liabilities
- Copy of site insurance
- Copy of your outline planning permission
- Architect’s professional indemnity cover (if required).
Do I need to have lots of money put aside for a contingency fund for my self-build?
According to Geraldine Hardman, Director, My Mortgage Brokers, you should always factor in a contingency fund. Around 10% is generally recommended for a flat site, where the ground conditions are known and 20% for a sloping plot or one where you are not sure what may lie beneath the surface.
Geraldine also says, “Building a home is often cheaper than buying a house but unexpected costs can arise. It is important with a self-build that you have a cashflow spreadsheet covering everything to build your home.”
She continues, “Consider Insolvency Protection, which is designed to provide assurance and cover against the possibility of the developer/builder going out of business midway through the build. The cost of work to either complete or get the property to a satisfactory standard whichever is less. Note that in all cases cover is subject to approval.”
How does insurance work for my self-build?
During the build you will need to take out a Site Policy which covers public liability. If you are doing the self-build work yourself you will need to arrange a Contract Works Insurance Policy which covers the build from the first brick to completion. Following completion and sign off by a competent consultant you will be able to arrange a normal buildings and contents insurance policy for yourself if you are going to be the occupant or a property owner’s insurance policy if you let the property out.
If a contractor is doing the work you will need to ensure that they have full contract works for either a one off contract or annual cover with a sum insured adequate for your works and covering the length of time that the works will realistically take to be completed. Following handover, again you will be able to arrange a normal buildings and contents insurance policy for yourself if you are going to be the occupant or a property owner’s insurance policy if you let the property out.
Chris Miller, CRS Consultants, advises you should speak to your lenders first to ensure that they do not have any demands on the insurance cover that is being placed for the works as they may want their interest noted on the policy or yours as Mortgagees.
Our thanks to Chris Miller from CRS Consultants, and Geraldine Hardman from My Mortgage Brokers, for supplying advice on self-build mortgages for this blog.
N.B. Please note your home may be repossessed if you do not keep up repayments on your mortgage.
DISCLAIMER: this Guide does not constitute financial advice. For any financial advice please contact an approved FCA self-build mortgage lender.
