Financing Your Self Build – From Savings to a Self Build Mortgage
When listening to queries at different Self Build shows and seminars, a popular topic is finance. There are many people across the country who would like to build their own home, but a large number are unsure what their options are for funding their projects. Everybody has different financial circumstances, but there are different options available to suit the varying needs of would-be Self Builders.
An obvious starting point is with your own cash savings. If you plan on raising money from the sale of your home, building societies such as Nationwide advise that personal savings can be a useful way of offsetting costs such as paying rent for temporary accommodation during the build process. Personal savings and any equity raised from the sale of your home (if you have chosen to sell) are good starting positions – but more often than not Self Builders will need to acquire a mortgage to finance their build.
It is best to speak to a few mortgage providers to work out which one can offer the optimum Self Build mortgage option for your financial circumstances, and your design plans. Homebuilding and Renovating Magazine have a great page on their website featuring live Self Build Mortgage rates, from a variety of the most popular lenders. It’s worth having a look around – you want to get the best financial support to suit your project.
Unlike buying a home, a Self Build project requires a series of payments in accordance with the different build stages. When planning your Self Build project, it is important to work closely with your architect and contractors in order to sort out the stages which suit your build method and timescales best.
One of the key problems faced by Self Builders is cash flow. Working closely with contractors to create a full house-costing and project timeline can identify any areas where cash flow might be tight – for example, ordering parts of the build with larger one-off costs, such as the main kit or windows. These can then be factored into the staged release payments with the lender, removing the problem before it exists.
Some banks and building societies differ, but, generally speaking, there tends to be two types of Self Build mortgage available. The first is released on an arrears basis, and the other in advance. More suited to those with some savings behind them – and those who already own their land – the arrears Self Build mortgage sees the lender release the funding at the end of each of the stages once the work has been completed. If the land or existing structure is owned with no funding secured against it, a lender may, in effect, release funds in advance of each stage of the build – as funds may be released against the unencumbered security. A minimum of 10% of the total borrowing facility will be retained – until the property has been certified as built or completed.
When buying a plot of land, the arrears option suits the Self Builder with substantial savings, as the lender tends to release the funds for the remaining cost of the land after the Self Builder has paid a significant percentage as a deposit. Having sufficient savings to begin the early stages of the build work, such as the digging of foundations, is also beneficial and a Self Build mortgage in arrears could be the best option for you if your savings cover this.
The likes of BuildStore offer Self Build mortgage funds in advance, as it is often difficult for Self Builders to access the money required to pay for a deposit on land, whilst simultaneously finding enough for the initial building stages.
BuildStore’s Accelerator Mortgage Scheme releases the money for each phase of the Self Build at the beginning of each stage as opposed to when it is completed. This option tends to suit those Self Builders who have a smaller amount of cash available, and who might not want to sell their current home to release equity until their new Self Build is completed. BuildStore also recommend this as a sensible way of keeping any savings you do have as a good contingency fund for later in the project. It is important to know at an early point the cost implication of funding in Advance, as the insurance policy to enable funding to be released in Advance of each stage can be costly.
A number of banks and building societies tend to be flexible with stage release funding. The important factor to remember is agreeing the stages with a lending institution prior to the construction taking place, and prior to the issue of the formal offer of funding.
Some banks, such as the Bank of Scotland, are a lot more flexible in favour of the borrower, and they allow the client (or their architect) to decide their required stages of payment. These banks can also offer the inclusion of initial upfront payments to cover the land acquisition and the important professional fees.
Whether your Self Build mortgage is paid in advance or arrears, each stage of the completed work requires checking, and must be signed off by a qualified professional. Typically, this stage will be carried out by an architect or surveyor – so it is wise to look ahead and factor these extra costs into your overall Self Build budget. In some instances, a bank or building society will also want the client to engage a Quantity Surveyor to sign off interim and final stages of the build. This, of course, is an added cost to the client.
No matter how well we plan or prepare, things can still go wrong when least expected. To protect yourself from any potential problems, it is vital to secure site or renovation insurance. From the moment you purchase your Self Build plot, you become liable for any accidents or injuries to members of the public on your site, and it is a legal requirement to have such insurance. It also protects you from the likes of flooding or vandalism on site – removing the threat of an unfinished project, an abandoned site, and crushing financial implications for you and your family. Site insurance is also required if you are taking out a mortgage to fund your Self Build project, as lenders will not release any money without proof of site insurance being in place.
Similarly, ensuring a Structural Warranty for your project can protect you from any potential problems further down the line. For a lot of Self Builders, there can sometimes be the misconception that an architect’s certificate protects them from the likes of structural defects, and provides some kind of insurance. However, this is not the case!
An architect’s certificate only states that the building meets the required minimum standard. This means that should any structural faults occur as a result of the architect’s negligence, it is down to the homeowner to take legal action and prove this. Therefore, it is hugely important to take out a Structural Warranty – this insurance policy will cover specific problems such as cracked walls, penetrating damp, and faulty drainage systems. In the event of problems occurring, the Structural Warranty saves you time and effort, as the warranty provider will fix the defects instead of you having to chase up builders, architects or engineers. Your warranty provider will also check your Self Build plans, and undertake regular inspections of your home throughout its construction.
Site Insurance and Structural Warranties should be obtained at the very early stages of your Self Build, and are required before anything can happen on site at all. For more information about the costs and coverage of these insurance policies, see Buildstore and Homebuilding and Renovating Magazine for a few extra tips!
In order to keep your project progressing, cash flow needs to be monitored and budgets should be adhered to as closely as possible. If you can save yourself some money at any stage of your Self Build, you should! Here are a few tips to help your money go as far as possible:
It is worth bearing in mind that new build houses are VAT exempt, however, you are only able to claim this back up to 3 months after the build has been completed. However, in some cases contractors and suppliers will not charge you VAT, as they are already VAT exempt. It is always worth checking with your contractor if their fee includes VAT, as your cash flow will benefit greatly from keeping more money in the pot throughout the project. For more information on reclaiming VAT, completing the VAT 431NB form of for general advice, refer to HMRC’s website.
There are some building societies, such as Ecology Building Society, who offer preferential mortgage rates for buildings that are eco friendly. Ecology encourages this by offering a discount of up to 1.25% off (for Certified Passive Haus) the Standard Variable Rate. The discount will be applied on confirmation of the energy rating your Self Build achieves – the higher the rating, the bigger the discount!
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