Note for members
This is an overview of the funding arrangement most often used by self builders, but does not cover all the options covered in the clubs work book on funding, members should read the article below as an introduction then use the workbook to identify the options available to them and what other research they should undertake.
Funding a self build is often easier than a conventional house purchase, and there are a number of options available, some of which go well above or disregard income multipliers, that are often the holding factor limiting the size of a mortgage you can get.
A number of sources offer build funding specifically, often with stage payments, and some promoted for the building and property trades promote the idea of 100% funding being available.
It is also possible to fund the project by using a combination of the equity in your existing home and mortgage on the new build, with stage payments, often disregarding income multipliers and allowing you to live in your current home during the build and sell it once the new property is complete, or convert it to a buy to let and let it out. These combination arrangements are often available through banks, but may cost fractionally more, however they avoid the situation you see some get into, where they sell their current home first and then either live on site in a caravan during the construction, or rent another property. The additional cost would be less in any event, than the cost of renting a property short term, and paying for storage for some property. Some banks also fund builds direct from the branch as loans and then convert them to a mortgage on completion, so that technically you don't have two mortgages at the same time, depending on the rates and package this can have some advantages, particularly where you are looking for a fast completion time. It may also allow more flexibility if a problem comes up, so with conversions, may be a consideration.
In recent years with property prices increasing, holding the existing property until the new one is completed has produced large windfall profits in addition to that expected, covering the cost of additional funding and often also covering the cost of new furniture throughout the new house and more. The small number who thought that they could save money by living on site, lost out on these. Living on site in a caravan should be avoided if possible, projects can overrun, building sites can be messy places and the friction it causes in many families takes years to recover from. While living in a caravan for short period can be fun, even the largest caravan can feel very small when you have to live and work from it for an extended period.
In considering the options you may also like to look at other combinations, for example could you raise a loan on the existing property, and a mortgage on the new build separately, or when completed do you sell the existing property or convert it to a buy to let mortgage and rent it out, possibly selling it to a company owned by you so as to make sure that you do not loose the tax free equity you have acquired.
The self employed and those with more complex incomes will find that some lenders offer self certified mortgages, with no proof of income, but at often a lower percentage of the total and a slightly higher interest percentage. If on the other hand you can prove your income, and have documentation to show then you can get a lower rate.
The reason why some people choose to sell their existing home and rent for the build phase, is that some lenders deduct the existing mortgage from income before allowing it to be used to calculate a multiple sum that can be raised, therefore by selling and renting they have no mortgage for the period and can raise by this means a higher new mortgage. This is a somewhat silly arrangement and many lenders and brokers have arrangements now that can get around this. There are many people out there who would like to sell you their mortgage product, so its wise to look, question and look for ways around any limits or problems placed in your way.
There are restrictions as to how helpful we can be in relation to advising on mortgages, and we do not want to get near to the point of being considered to be acting as financial advisors. In addition, what the best deal is this month may not be the best next, so we have not here included details on specific funding sources. Within the articles section we may at some point, but for now specialist mortgage magazines and sections within self build magazines may be a good starting point for non members, while members will find that the work book on this topic guides them in the direction of further research and equips them with the questions to ask.
So how much can you Borrow
Usually up to 95% on the land and 95% of the build cost, later, 95% on the valuation of the completed property, which may be considerably larger than the first two together. In effect in excess of 100% of the total cost. You may also find that re-mortgaging on completion of the project is wise, as often the mortgage you then want is a lower percentage of valuation, and mortgages with a lower percentage, can often be acquired at a lower interest rate.
Some specialist brokers and others promote the idea of 100% mortgages from the beginning, but these may turn out to be a combination of a mortgage and a loan, and you may be able to do better yourself without paying the fees to people to get this for you.
The limiting factor maybe your credit standing and your provable income. If you have had credit, credit cards etc, and have no problems and have a provable income, then you are unlikely to have a problem getting funding up to at least 4 times your income. If you have a cash sum or equity in existing property, this will be available in addition. It may be that with some research you can raise considerably more. If you are unable to prove a high enough income then self certification may allow you to include other income sources or potential income sources. With a large number of types of funding and competition between lenders, most people, even if they do not initially think they will, will be able to find a way to arrange the funding. There are also a wide range of other means of getting funding of you have any problem, some of these are covered in the article on funding where you do not think you can raise the money and more ideas are in the work book.
Stage payments
Many mortgages for self build come in stages, usually on the completion of specific stages, and there may be a little bit of flexibility here in understanding what needs to be scheduled before other items. This is not normally a problem as contractors who undertake a lot of work for self builders, will be aware of this and it will not be difficult to persuade them to have arranged their payment schedules so as to match the available funding.
One mortgage package specifically aimed at the self builder goes further and includes stage payments released in advance, ability to pay for timber frame ahead of delivery, being able to stay in your existing home during the build, while offering up to 95% of land and build costs. A number of others have either similar arrangements or arrangements that give the same effect. Some also allow mortgage interest payments to be rolled up until the end of the build, so you do not start paying the new mortgage until you have had a chance to complete the build property, and sell off your existing property, so eliminating one mortgage and releasing equity.
Where construction stage payments are to be made, the arrangements may vary slightly but are often around:-
Some allow some flexibility and some designs may be slightly different. One company that promotes 100% loans not fixed to earning multiples is aimed more at the building trade, but negotiates every deal independently.
The chicken and the egg problem
So do you see what mortgage you could get, then decide on the project or do you decide what it is that you want to do, and then sort out how to fund it.
The answer is most likely to be, to look at what you could raise under a variety of schemes and select the one that you feel will be best for you, getting approval in concept to fund you. This means that should you find the ideal plot you will be in a position to move fast, in any event the funding agreement is for a maximum sum, you don't have to spend that amount, and will always be subject to valuation.
Given that you have funding available up to a known level, you can then go about sorting out a budget and defining your needs etc.
Moving forward from this point you may discover that alternative arrangements may be better for you, for example if you change the means of construction and want a different schedule of payment that the lender cannot meet. Having a firm offer from one, also tends to make others act more competitively.
Later you may want to check out alternative sources or renegotiate your original deal, but at least you are able to move forward.
You are never stuck with a single lender, at any point during the build you can look at swapping to another. This often occurs on conversion projects, or super modern arty designs, where the costs rise and the original lender is not prepared to increase the mortgage.
Comparing costs
You would be surprised at just how many people will haggle over the price of a bathroom fitting, or seriously consider not joining this club so that they can save the fees, and then just sign up for the first mortgage deal to be offered. Mortgage rates and methods of calculation, fees, and other conditions vary enormously. You need to fully cost each mortgage being offered to you and to go looking for other variations where you can so as to get the very best deal for you.
So many people still look on a mortgage offer as being offered a favor, no one is doing you a favor offering you a mortgage, they are selling you a very expensive financial facility, and those selling it to you are usually also getting a great big fat commission for doing so. Some may point you in the direction of mortgages that provide the largest commission, rather than the one that is cheapest and best for you. So take a closer look, and ask others who you know can get a good deal, if what is being offered to you stacks up.
Banks have symbols outside, the sign of the vulture and the sign of the highwayman (black horse), comes to mind. banks have always worked for the benefit of themselves not the customers and this is unlikely to change.
Once you have an offer, you can move forward and start looking, but it does not hurt to also spend some of the time while the plot is being found for you, to take another look at the mortgage scene and see if you can better the deal you already have. Some may say the rate deal you are being offered is really good, but a number of UK companies have recently borrowed money in the far east at 1%, so compared with this, any deal you are offered is likely to look expensive.
Concluding
If the project you have is designed either as a viable business venture or is affordable by you, it is likely that it will not be a case of, if you can get funding, but which package on offer is most cost effective and meets your needs best.
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