The task of arranging self-build mortgages is simple in theory but in practice there are a number of issues you need to be aware of. All parts of the self-build process through planning, architecture and the build stages require expertise from specialists in their field and financing is no different.
Key Steps for Self-Build Mortgages
1 – Finding a site of interest
Lenders will require full planning permission to be in place at the point of application so for the purposes of this article we will not be going into specific details on the planning procedure. If you are considering buying a site with no planning this is a different proposal which would require some short-term funding up front. Land without planning is advertised through local agents and online agents alongside traditional property.
2 – Basic number crunching
It’s likely that the current owner or architect, involved in the planning, will already have a rough idea of both the build cost and final value – sometimes this will be included in the selling agent’s sales brochure. Use online resources and local agents to check that these figures are realistic. If planning has been granted for a 4 bed detached house, you can find any 4 bed detached houses recently sold in that area and check that the sales figures correlate. Square footage of a property is the key, there will always be some variances in the standard of finish and exact location but the square footage figure should give you the security that your final valuation figure is realistic. While the main incentive for embarking on a self-build project is to live in one’s dream home, rather than making money, it’s still important to make sure the numbers work in your favour.
3 – Make an enquiry with your finance provider
At this relatively early stage it is advisable to hold initial talks with self-build finance providers to gauge the potential level of borrowings on offer. Self-build mortgages are underwritten in the same manner as standard residential mortgages, what you can borrow is based on affordability and there will always be a limit to your borrowing potential. Lenders will not want to agree to a proposal where it’s not clear the client could finish the project. Borrowers with a good track record will obviously give themselves a better chance of securing funding.
4 – Finding a builder
It is vital that you spend as much time as possible looking at local builders or speaking to anyone who may have completed a similar self-build in your local area. Good (and bad) builders will generally have established a reputation in the industry. Ask them if they are happy for you to contact people that they have completed work for recently and even visit those sites if the owner is happy for you to do so. If a contractor is evasive when asked about recommendations, and past clients, you have to wonder what they might have to hide.
It is recommended that you obtain at least three formal quotes, however it may not be the lowest price that matters; quality, reliability and experience will come at a cost. You may want to look out for builders that display the TrustMark – this is a scheme run by the Government which vets builders and is effectively a seal of approval.
You will then need to draw up a contract with your builder of choice. The most common type of contacts are ‘JCT’, through The Joint Contracts Tribunal, https://www.jctltd.co.uk/. One thing to note is that it is often misconstrued that a JCT contract is going to be a fixed price contract, this is not the case.
5 – Consider warranty scheme or professional consultants certificate
If you are developing a new property and are intending to sell it, rent it or refinance it you will need a Professional Consultants Certificate (PCC) or a Building warranty. Mortgage Lenders will only lend on a property if it is covered by an approved warranty policy or a Council of Mortgage Lenders (CML) Professional Consultants Certificate (PCC). This may be part of the package provided by your builder – confirm this at the earliest stage, as any lender will want to know which scheme is being used.
6 – Make your self-build mortgage application
The planning, drawings, build schedule and warranty information will be packaged together along with the usual mortgage requirements, such as proof of income, to the mortgage lender. The lender will underwrite the case as per any normal application and intrust their own surveyor to visit the site. They will be guided by the surveyor and their comments on the land value, build cost and final value being appropriate.
7 – During the build and after completion
It is standard practice that the lender will advance more funds based on each re-inspection from the surveyor, until completion. Once the build is complete, most clients will then look to refinance away from a self-build mortgage, instead using high street lenders who can offer more competitive rates.
General thoughts on self-build projects
The vast majority of self-build projects will come in over budget or over deadline, or both! You should expect to see a minimum 10% contingency in the build costs. As self-build mortgages are drawn down in stages and interest is only paid on the outstanding balance at the time, it makes sense for borrowers to apply for a total facility slightly larger than appears to be required. This will give them financial headroom in the event of unforeseen issues going forward – if forced to apply for distressed finance further down the line this might set alarm bells ringing for lenders.
Some lenders will release funds at the point of defined pre-conditioned stages only, whereas others offer the ability to have the site revalued at any time and make a further release based on the current site value. In general it is sensible to utilise the services of a lender who works on the latter basis. This additional flexibility has saved numerous projects from collapse where a client may be stuck between 2 stages of the build without the funds to proceed any further.
As with choosing the right builder, choosing the right lender is crucial and cheapest cost is not always the best option. A lenders ability to be flexible when things go wrong is vital to any project being completed successfully. NM Finance has a long-standing relationship with a number of self-build lenders who are on the borrower’s side from start to finish.