Self Build Mortgage Financing

A complex financing structure is one of the key issues that must be dealt with, when it comes to self-build projects and a obtaining self build mortgage. Traditional financing is not necessarily an option, with mortgage companies only being prepared to offer a mortgage on the property that actually exists - not that will exist in a few months' time! For this reason, the level of financing available from a traditional mortgage provider would probably only cover the value of the land, not the building costs.

Traditional Mortgage and Loans

One option is to create a self build mortgage through using a combination of a traditional mortgage and loans. This involves obtaining a mortgage on the value of the plot of land and financing the build part of the project through separate loans. This approach has several advantages, the main one being that there is no need to conform to the stages that must be completed for a self-build mortgage. By paying for the build through an independent loan, it is possible to build according to your own schedule, without being obliged to comply with the requirements of a self-build mortgage.

On the downside, the cost of a loan is likely to be considerably higher than the cost of a mortgage. Consequently, the monthly payments will be significantly greater and budgets should be adjusted accordingly.

Another issue is that an unsecured loan is typically offered on the basis of income. As an investor, this may prove problematic, particularly if the property is your sole business. The higher the level of risk that you pose to the lender, the higher your repayments and the less favourable this option becomes. Generally speaking, an investor with a reliable income from employment will have the option of obtaining a loan that offers flexibility, without blowing the budget.

Self Build Equity Release Mortgage

A variation on the above is the option of using equity release to produce the necessary cash to fund the actual build. The combination of a mortgage on the land and cash, either from savings or from equity release, often offers the best of both worlds in that you will have the flexibility of using cash for the development whilst using mortgage finance to purchase the actual plot.

Self-Build Mortgage

Despite the availability of other options, the vast majority of people choosing to self-build tend to utilise one of the many specialist mortgages that are now available, purely to deal with the unique situation of self-build. These types of mortgages are highly specialised and are dealt with in their own section.

Stage Payments

The defining feature of a self-build mortgage is that the finance is forwarded in stages, as the build progresses. Broadly speaking, there are two types of self-build mortgages available: those that provide you with finance at the end of the relevant build stage, and those that offer finance at the beginning of the relevant build stage. Either way, there are defined stages to the build which will have to be adhered to in order to remain on track with the self-build mortgage payments.

Typical Stages

Whether you have opted for the advance payment or arrear payment option, the stages are likely to be very similar and will depend on the type of property that you are building. Although every company works slightly differently, most will split the mortgage into six distinct phases.

With a brick and block building, the stages are usually as follows:

• purchase of land;
• foundations and initial architectural costs;
• achieving wall plate level;
• becoming water and wind tight;
• plastering throughout; and
• completion.

With a timber frame property the stages are the same except for the third stage which, instead of achieving wall plate level, involves the erection of the timber frame.

Valuation Issues

One of the ongoing issues that must be dealt with every time a stage payment is requested from the financial institution is the presentation of values and costs for the relevant stage. When selecting a self-build mortgage, it is vital that you consider the method used to value the various stages. With stage payments in arrear, it is slightly easier as the financial institution will value the work that has been completed and then forward the relevant percentage, which can be as little as 60 percent or as much as 95 percent.

With payments in advance, it is necessary to prove to the lender the anticipated costs of the build and the likely value that will be added to the plot by the planned works. Therefore, the payment in advance option, whilst being good for cash flow, is actually more intensive in terms of paperwork and business plans.

Self Build Regulatory Issues

Building a property from scratch is bound by numerous regulatory issues. Regulation is essential to ensure that safety is maintained and that developments remain in keeping with the surrounding area. At every stage of building, you will have regulatory matters to deal with and overlooking these issues could be extremely costly in both time and cash.

Planning Permission

One of the first things that you have to deal with is planning permission. Planning permission is obtained either as outline or as full. Outline planning permission is simply tentative permission and suggests what could be obtained as full planning permission. Commonly, those selling land will obtain outline planning permission, beforehand, as this is a relatively quick process and does not require detailed plans. Once you have outline planning permission, you are in a position to make a full application with much more confidence, based on the outline plans, provided you are not too ambitious. For example, if the outline planning is for a three bedroom bungalow, submitting a full application for a five bedroom house is unlikely to be successful.

Full planning permission will require detailed plans that are drawn to scale. Generally, it is essential to seek the assistance of a specialist architect who not only understands the ramifications of property design, but is also aware of local planning restraints. Planning permission requires that building starts within five years of permission being granted. After five years, the permission becomes lapsed and a new application has to be submitted.

Building Regulations

Building regulations are an entirely separate issue to planning permission and must be obtained even on projects that do not require planning permission. Building regulations are administered by the local council and permission is granted to the property owner once the build has been completed and inspected. The inspection process is purely to determine whether the build has been carried out safely and in accordance with current guidelines. Many builders deal with the issue of building regulations as part of their role, but make sure that someone arranges for the inspections at the appropriate times. If you delay requesting an inspection, you may find that part of the construction work has to be removed to allow access, thus wasting time and money.

New Build Guarantees

It is possible to purchase a guarantee that covers the structure of the property. Almost every developer will provide a 10-year guarantee and it is generally assumed that a new build property will come with such a guarantee. Therefore, a suitable insurance policy should be obtained as soon as the property is complete to ensure that you have the best possible chance of selling the property.