When planning to build your own home it’s important to obtain expert financial advice early in the process so you’re able to understand your loan options and therefore your budget.
To calculate what you’ll have to spend you need to look at the money you currently possess and how much you can borrow. A specialist mortgage will be required as, unlike traditional mortgages, there will be no habitable property to lend against and the money will need to be accessible in stages to fund the progress of the project, from foundations to final fix. To determine the total amount you can borrow, lenders will need to analyse your financial situation; your income, outgoings and cash you’re able to contribute to the build. A range of options are available to self-builders and you’ll need to evaluate the different products to decide which suit your individual circumstances and requirements.
Payments will be either valuation or cost-based. A valuation based or ‘arrears’ stage payment mortgage releases funds after each phase has been completed and an appraisal has taken place showing an increase in the value of the property. This is so the lender doesn’t loan more than your project is currently worth at any time. Issues can occur with this type of financing if the evaluator returns a figure that is lower than expected and therefore less cash than anticipated is given, causing cashflow concerns. Cost-based or ‘advance’ stage payment mortgages, on the other hand, provide guaranteed outlays at the start of each build phase based on project costs. This tends to be a more suitable choice as the borrower has more control and can remain in a ‘cash positive’ position throughout the build.
Positive cashflow is paramount to any successful build project and so this must be a significant factor when deciding on which company to secure finance with. Sufficient cash needs to be available to suit your schedule, so don’t just look at the amount you can borrow but when that money is accessible.
The personal and financial information necessary to apply for a self-build mortgage will be the same as if you were applying for a traditional one, but the lender will also require a copy of the plans for your new home, planning permission, cost breakdowns and a structural warranty.
If you are borrowing money to complete your self build you will need to take out a 10 year structural warranty. Purchasing an insurance policy such as this ensures that if any structural defect is detected in your home you’ll be able to make a claim, thus essentially protecting the financial investment that you/your lender has made.
There are a number of companies on the market offering structural warranties, the most common being Buildzone and LABC. The NHBC is the name most synonymous with build warranties but they tend to focus on the higher volume house builders rather than the self build market.