Everybody has different financial circumstances, and in a cost-of-living crisis, the last thing you want is to put money in the wrong places. There are many different options available to suit the varying needs of would-be self-builders, and AC Architects always help their clients find the right one for them.
In this article, we’ll show you how proper financing can turn your savings into a sustainable self-build mortgage.
WHERE TO START
An obvious starting point is with your 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.
The Scottish Building Society offer a self-build enquiry service on their website. It’s worth having a look if you want to get financial advice surrounding your project.
HOW A SELF BUILD MORTGAGE WORKS
Unlike buying a home, a self-build project requires a series of payments in accordance with the different build stages. Typically 75% - 95% of your plot and build costs can be borrowed with a stage payment mortgage, but this is dependent on your financial circumstances.
When planning your self-build project, it is important to work closely with your architect and contractors 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 tend to be two types of self-build mortgages 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.
It's also important to note that you can acquire a self-build mortgage even if you have a mortgage out on your current property.
COME IN PREPARED
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 recommends 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 the cost implications of funding in advance at an early point, as the insurance policy to enable funding to be released in advance of each stage can be costly.
Several banks and building societies tend to be flexible with stage-release funding. The important factor to remember is agreeing on the stages with a lending institution before the construction takes place, and before 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 on the interim and final stages of the build. This, of course, is an added cost to the client.
SUCCESS IS ENSURED WHEN PROPERLY INSURED
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.
SAVING MONEY IN THE LONG TERM
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!
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, refer to HMRC’s website.
There are some building societies, such as Ecology Building Society, that offer preferential mortgage rates for buildings that are eco-friendly. Ecology encourages this by offering a discount of up to 1.50% off (for Certified Passive House) 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!
Embarking on a self-build journey with a self-build mortgage opens a world of possibilities for individuals with a vision to create their dream home. The flexibility, financial advantages, and personal satisfaction derived from overseeing every aspect of the construction process are unparalleled.
As you navigate the intricacies of securing a self-build mortgage, remember that thorough research, realistic budgeting, and a well-thought-out plan are the keys to a successful self-build.