If you’re new to self-build, perhaps considering whether building your own home could be the path for you, it’s likely you’re weighing up the pros and the cons, and, most importantly, whether self-build is financially viable.
Financing a self-build project is, as you’d expect, quite different to the process most of us are used to in terms of securing a straightforward mortgage on a property, accompanied by a deposit.
Where self-build is concerned, money is released in stages as the build progresses. A foreign process for most of us to navigate, it’s understandable that finance is one of the leading worries for self-build newbies.
Yet, rather than navigating a maze of information and potential pitfalls solo – good old Google aside – getting the right advisor on board will make the process of securing funding much more straightforward, and infinitely less stressful.
Engage a self-build finance specialist
Engaging an advisor who is experienced in dealing with self-build finance and mortgage providers, with a solid understanding of the process, should be one of the first tasks to cross off your list. Self-build mortgages are a specialist area, and not something every mortgage broker will have experience of.
Ideally, you should begin speaking with mortgage advisors before you have sourced your plot of land. They will not only be able to help you to work out what you can afford, based on your savings and existing commitments, but getting the ball rolling early-on will prevent any delays once you do find your perfect plot.
Having your mortgage advisor on board in advance will be invaluable when you do find your self-build plot – some mortgage lenders will only lend on plots with detailed planning permission already in place, while others will accept outline planning permission. Your advisor will be able to support you in navigating any potential issues, helping to ensure that the purchase of land is unencumbered.
Self-build finance options
There are several ways to finance your self-build project – while some are lucky enough to be able to finance the project using savings alone, this is rare. Most self-builders do need to secure some form of finance to supplement their investment.
Often, there is also a home to sell, with the proceeds contributing to the build costs, during which time you will need to find short-term accommodation. If a Grand Designs-style caravan sortie isn’t your thing, you’ll need to rent temporarily, or perhaps stay with family for a short time until your home is built.
Most people building their own home will choose a mortgage to supplement their deposit. Ordinarily, around 75% of the land cost and 60% of the build cost can be borrowed, so your own savings will need to cover the rest of the costs.
Money will be released in stages as the build progresses, with two types of mortgage: ‘advance’ and ‘arrears’.
With an ‘arrears’ mortgage, your lender will release funds to purchase your plot, with additional lump sums released in stages thereafter, once each stage has been completed and only after a valuer has visited the site.
However, while ‘arrears’ mortgages are well-suited to self-builders who have healthy savings to fund the early stages of the project, along with savings for the deposit for the purchase of the plot, this isn’t universal. Good news, then, that alternative mortgage products are available for those requiring more finance to make their self-build home a reality.
If this is the case for you, your mortgage advisor will need to source an ‘advance’ mortgage that will allow money to be released at the start of each build stage, rather than on completion, providing the cash to purchase materials and pay your builder. This option will also be a good choice for those who don’t wish to sell their home before the build is complete, saving on expensive rental and storage costs – although, the borrowing cost for ‘advance’ mortgages is usually higher due to the level of risk, which will likely cancel out any savings.
Securing the right mortgage, on the right terms
Happily, there are a range of mortgage products available for your self-build project – your mortgage advisor will be able to support you in finding the right option for you, whether tracker, fixed or discount, and on the right terms.
It’s important to settle on the option that best suits your circumstances, which, as with most things in life, is a matter of weighing the pros and cons before making your decision. While it’s tempting to give greater ‘weight’ to the option that allows for the smoothest build, it’s important to consider the long-term, thinking about repayment terms and any clauses that may prove cumbersome in the future.
Alternative finance options
For some self-builders, a mortgage isn’t on the cards. Those who own their own home or have a large amount of equity in it can look at remortgaging the property. Alternatively, a bridging loan can be used to pay for the new plot and/or fund the build costs. Once your dream home has been completed, the old house can then be sold, with the finance paid off. However, time limits will apply.
Effective budgeting and contingency funds
It’s important to work closely with your mortgage advisor and your architect or building contractor on your budget – always allow additional ‘room’ for unplanned overspend, plus a contingency fund for any unexpected issues. A 20% contingency is usually recommended.
People are often surprised to learn that self-build is more cost-effective than simply purchasing a home, not least due to the tax breaks it offers. For example, instead of paying stamp duty on the cost of the property, you only pay stamp duty on the purchase price of the land. Similarly, self-builders are also exempt from the Community Infrastructure Levy (CIL) which is normally charged when planning permission is granted for a new home.
Financing your self-build project needn’t be a minefield – an experienced advisor will be able to support you in choosing the right finance options for your project and your circumstances, helping you to make your self-build dream a reality.
Take a look at our look at the mortgage brokers working with us – they’re all experienced at working on self-build projects just like yours.