Tom McSherry from BuildStore explains the importance of cashflow when it comes to building a house and why a big part of selecting the right mortgage product is about planning your project around your budget and making sure you have accurate costings.

Interview with Tom McSherry

Tom McSherry is the National Business Development Manager at BuildStore with over 30 years of experience in financial services, 19 of which have been exclusively at BuildStore. With a background in engineering and a passion for construction, he has also successfully managed the development of his own family home, emphasising the importance of professional involvement in the design and construction process.

Engage early and start with a clear budget

No matter what your financial circumstances are, you will get the maximum benefit by engaging early with a mortgage provider and planning your house build around your budget. For some, the incubation period may be three or four years, and BuildStore has a specific team that will support early engagers.

Tom says that setting a clear and realistic budget is essential. Architects, designers and package solution providers should then work within these parameters, reducing the risk of a Grand Designs style ‘disaster’.

Remember the 3 ‘C’s – construction, cost and cashflow

While determining how much money you should borrow is a key stage, cashflow is the most important aspect of your finances once the build is underway. This ensures timely payments to contractors and the smooth progression of the build. Of course, all of this hinges on an accurate understanding and modelling of construction costs in the first place!

Money is drawn down in pre-determined stages

Part of the planning before construction will include how much money is paid out and when. These are called ‘stage payments’ and at BuildStore there are three options:

• Valuation based arrears – Payments are made when the value of your plot or property increases.

• Stage payments in arrears – Money is released on completion of each stage of your build.

• Advanced stage payments – Money is provided in advance and based on your costings for that stage.

There are pros and cons to each of these mortgages but ultimately it comes down to your personal circumstances as to which is more appropriate.

For example, if you were embracing off-site manufacturing for your house build then you may have some significant costs upfront.

“The advanced stage payment, the accelerator mortgages as its known, delivers the money into the customer’s bank account prior to the beginning of each stage, which allows them to pay for their superstructure in a timely fashion. And it’s a complete mitigator of risk again, you know exactly what you’re getting at each stage.”

There is a degree of uncertainty with valuation based mortgages

For this product the stage payments are based upon a valuation in arrears. This means there is no guarantee of how much you will receive at each stage, because it will depend on the independent valuation that is carried out.

Therefore for projects where the property’s value temporarily decreases after the completion of a stage — such as when a barn is stripped back during a conversion — the valuation-based model may not be the best fit.

“If I’m adding a large wraparound extension to my home, I can use the same stage payment mortgages, but of course at some point I’ll create openings in the walls to create an extended area, my property that could be worth 300,000 could drop to 150 in value, because it’s no longer even wind and watertight.”

Secure your mortgage as early as possible

Every project is different and will require a tailored approach, and so you put yourself in the best position by starting the conversation early.

Even if you plan to use cash for most of the build, still engage early

If you have a lump sum to get your project started and think that you can secure a mortgage later, perhaps during construction, then you may be in for a shock. Setting up a mortgage takes time. It may be better to work with your mortgage adviser to form a plan incorporating your own funds.

For example, you might draw down a small amount early on to get the mortgage live and then use your own funds, safe in the knowledge that you have funds in place to complete the entire build.

Draw down your money when you need it

Whilst you could borrow funds for the entire project at the beginning of the process it probably doesn’t make sense as you would be paying interest on the whole amount when you don’t need it all yet. Therefore if you draw down only the amount you need for each stage, you will be minimising these charges.

“So if I’ve got a build project, it’s going to take me 14 months, I don’t want to take £300,000 on day one and service that debt, I’d rather take £30,000 for my foundations on day one, and make an interest only payment on £30,000.”

Other ‘safety nets’ can be put in place

BuildStore not only provides mortgage advice but will keep in touch throughout the project with monthly check-ins. In addition, they offer site insurance during construction and a 10-year structural warranty which goes live upon completion.

You may also want to explore personal insurance which would cover you against changing circumstances such as redundancy, critical illness and bereavement.

Self build mortgages are temporary products

As the name might suggest this is a mortgage that helps you get through the build. Sometimes you may even choose to pay interest only.

So once a completion certificate has been issued it makes sense to switch to a standard residential mortgage, often with a free switch facility. This approach ensures clients transition smoothly to a longer-term mortgage that best suits their needs.

Make sure your mortgage advisor has access to all lenders

Tom’s closing advice emphasises the importance of early engagement and accurate budgeting in self-build projects. He advises that clients work with industry specialists who have access to all lenders and product types to avoid issues like running out of funds or delays in receiving stage payments.

“I’m not going to my GP for surgery, I’m going to go and deal with someone who knows specifically, that’s what they do day in and day out.”

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