With so many decisions to make on your self-build journey engaging with the relevant professionals at an early stage can ensure you set out on the right path preventing expensive mistakes.
As well as the usual financial considerations, a Self Build project has other factors which can impact borrowing including:
1. The superstructure
2. The type of cladding
3. Roofing materials
4. Location
5. The level of deposit
6. Your attitude to risk
7. Payment terms to contractors and suppliers
As the above would indicate, this is a specialist area of financial advice, and as such, I would recommend you work with an industry expert who has the experience to understand not only the above material choices but, most importantly the cashflow requirements for your build.
WHERE SHOULD I START?
All construction projects should start with the budget. At BuildStore, this is a free service we provide where we engage with our customer at the earliest stage to establish a clear budget from the outset.
This should be shared with your Architect to ensure the project is being designed with the budget in mind. There is no point in investing time and money into creating a dream-only home only to be disappointed when you discover you cannot afford to deliver the project.
HOW WILL DESIGN AND MATERIALS IMPACT MY LENDING?
Whilst nearly all lenders will lend on non-masonry construction such as Structural Timber Frame, Structural Insulated Panels (SIPS), Insulated Concrete Form (ICF) and Oak Frame, the materials used in the outer cladding of the property can reduce the number of lenders.
As a result, it is important to engage with your mortgage advisor at an early stage so you understand the impact the choice of materials can have on your mortgage options.
HOW DO SELF AND CUSTOM BUILD MORTGAGES WORK?
Self and Custom Build mortgages are specifically designed for individuals who want to commission & design their own homes. The market is supported almost exclusively by regional Building Societies, with many of them distributing their products exclusively via BuildStore.
These types of mortgages differ from traditional mortgages as they take into account the unique aspects of Self Building or Custom Building projects. Here’s how Self and Custom Build mortgages work:
Initial deposit:
Just like with traditional mortgages, borrowers are required to provide an initial deposit. The amount can vary depending on the lender. Generally, a deposit of between 10-15% of the land value and the build costs is expected. However, there are exclusive products via BuildStore where a deposit as low as 5% of the land value and build costs are required.
This is ideal for those looking to remain in their own home during the build or first-time buyers with a low deposit. It is important to also note in addition, you will require the funds to cover your professional fees such as Architects, planning, legal fees etc.
Self and Custom Build mortgages are typically released in stages, known as stage payments, either in arrears based on the site value or cost based on the actual build costs.
The arrears valuation-based option tends to be suitable for clients who already own their site and have additional savings, as the funds are only released if and when the site value increases. It is important to highlight if the site value does not increase in line with your spending, you could run into cash-flow issues.
Cost-based lending was designed by BuildStore 23 years ago and has provided funding for over 26,000 projects in the UK. As the name suggests, the stage payments are guaranteed based on the project costs releasing funds either before the stage starts (Accelerator) or once the stage is completed. This works well for those who do not want the risk of a low valuation or simply want to remain in control of the stage payments throughout.
The Advance stage payment product works particularly well when using an offsite manufactured system as it can guarantee the funds before each stage of the build, enabling you to meet the payment terms of your manufacturer, who often require paying before the superstructure leaves the factory.
Interest only period:
During the construction phase, some Self Build and Custom Build mortgage products will allow you to pay the interest only as the funds are released. This keeps the monthly payments lower whilst the construction is ongoing, aiding affordability.
Once the build is completed, many lenders will convert the mortgage to a standard repayment mortgage with a penalty-free switch onto a new residential mortgage product. This can prevent you from paying a higher rate of interest beyond the build period.
Tailored cash-flow:
Lenders will expect you to have a good understanding of your build costs for the construction project. Your Architect may be able to assist you with this, or Buildstore can provide a costing service ensuring the cash flow is tailored to your project rather than having set stage payments that are not in line with your build.
Organising the mortgage is the first step in this exciting journey. However, it is essential that you have the support of your mortgage specialist all the way through the build and are not left on your own throughout, as this can be a stressful part of the project. As part of your research, it will be important to ensure you are working with a team who have access to the widest range of products on the market and will still continue to support you through to the end of the build and beyond.
TOP TIPS WHEN LOOKING TO FINANCE A BUILD:
- Plan your homebuilding project around your budget
- Make sure your cashflow is tailored to your project
- Cashflow is the most important factor, as having money when you need it throughout your project is key
- It is essential to have site insurance and a structural warranty for your project
- Engage with a mortgage specialist who has access to the widest range of products