Have you taken a serious look at the finances of your build?
Are you being realistic with how much money you have and how much you will be able to borrow?
In this article, I'm going to get an introduction to financing a low energy build with some help from Jon Lee, Business Development Manager at Ecology Building Society.
I must admit that the House Planning Help blog has almost entirely been consumed by design issues and working out what could be built. None of that has got realistic and considered cost but I'm hoping to change that now. Nobody wants to be the person who runs out of money and options, so where is that sweet spot of getting the finances just right?
Talk to a Number of Potential Finance Providers
This advice would make sense for any service one would hope to procure but it's relevant here because there are various types of self build mortgage and it does depend on your own financial situation as to which route will be best to go down. Jon Lee says: “Some lenders will provide funds only at a time when you’ve already bought the plot and you’re actually improving the value of the site by physically building. Other lenders will be more comfortable helping towards the financial purchase of the land as long as it’s got planning consent.”
Payments Made Against Increasing Value of the Plot
As with any financing the lender will need security. In this case it is a plot of land, which will change in value at various stages throughout the build. “In those interim phases where actually you’re doing quite a lot of work on a self build, it doesn’t necessarily correlate with spend against improved value. There’s quite a curve there and as you get towards the end of the build you tend to add a lot of value for not much more spend.”
After kitchens and bathrooms (and so on) have gone in, it becomes a much more marketable asset.
Generally Stage Payments are Drawn Down in Arrears
Once you have an approved mortgage, there will be certain milestones where the interim value of the site is calculated. At these points your lender will work out how much of your retention can be drawn against that and a tranche payment is made in arrears of the work. However, some lenders offer an ‘accelerator' mortgage which would provide funds in advance, so effectively giving you the money to do the next phase of works and then having the revaluation done. As this is more risky for the lender, ultimately it costs more.
Ideally You Would Have Equity to Borrow Against
Jon outlines a simple situation that shows why you would want to have a good sum of your own money invested in the project. Consider a plot that's going to cost £100,000. If you needed to borrow £80,000 of that, the lender might look at your income and the scheme and think it looks interesting. Even though your plans for the plot may suggest that the finished project will be worth £250,000 if you're borrowing £80,000 on day one you would have to consider where the funds are coming from for the rest of the build. At the Ecology Building Society the maximum loan to value is 90% on the residential mortgage, which would mean there's only really another £10,000 available to help you proceed with the building work (unless you’ve got other capital or help from the bank of Mum and Dad, etc.).
In this scenario an accelerator mortgage would be most appropriate, but it would be more expensive in terms of interest fees and arrangement fees. Plus if the budget got out of hand or a contractor let you down, you may be sailing very close to the wind!
Ecology Building Society Like to Work with Valuers Who Understand Low Energy Builds
Jon stresses that it's an important part of the process that both the valuer and the lender understand the type of construction, the materials being used and what the expected costings might be. Jon says: “We’d always ask the valuer to pass comment on whether they think the costings are realistic for what’s being proposed as well as taking on board the expertise or otherwise of the borrower themselves. They may well be serial self-builders. They could be people who have a background in building or architecture and so on and so forth. All of these things get taken into account.”
Don't Over-Stretch Yourself
You may have read case studies of where multiple difficulties have led to the self or custom builder being unable to borrow any more. A good lender will be accessing the risk in the early stages. Jon explains: “Certainly the net book value of what is being mortgaged is inevitably a primary consideration as well as making sure that the borrower is not being over-stretched in terms of their ability to cover interest payments during the build phase, especially if they’re having to take a sabbatical from their day-job to see the project through.”
Don't be Put Off if You Haven't Been Through the Process Before
While it's always preferable to have as much detail as possible about the cost of a build and quotes to back it up, Jon admits that some of the best schemes he's seen have been from people who openly admit they haven't got a formal business plan and are working their way through.
Not Being a Volume Lender Allows for a Much More Personal Service
Ecology Building Society underwrites about 20 to 25 mortgages a month. As they are not a volume lender they are more able to cope with projects on an individual basis. This is particularly relevant when that don't necessarily fit the normal system.
Best Discounts For High Energy Efficiency
Clearly as the Ecology Building Society aims to support a more sustainable future, it offers its best discounts for projects that either benefit the environment or the community. Buildings that meet the Passivhaus standard are rewarded with the top of the range discount off their standard variable rate. Find out more about their C-Change discounts, which run from Passivhaus down to Code for Sustainable Homes Level 4 or properties that achieve at least a B-rating on an Energy Performance Certificate (EPC).
Underwriters Want to See Investment in the Building's Envelope
As ecological construction is fundamental to their business, it falls to the underwriters to make decisions on granting these discounted mortgages. Jon continues: “Our staff are well trained to be able to look at, not only the projected EPC which any property needs to have [in the UK] but also to look in more detail at the materials that have been used. For example, we don’t lend on new builds even if they do achieve the required level if the borrower is putting in UPVC windows and doors. We’d be looking for other clues that sustainable materials were at the heart of the build so things like a good standard of glazing, decent levels of insulation, natural materials and where possible locally-sourced materials.”
They will also not rule out other options – such as a kit home that’s been sourced and shipped from Sweden – so as long as it’s still using sustainable materials.
Talk to Your Finance Provider Early on
As with most members of the construction team, it makes sense for your finance provide to be involved from the initial stages. In other words, don't wait until you've bought the plot before you begin to look for finance. Lenders like to take everything into account at the early stages. Jon highlights why this is a good idea: “We can maybe advise them as to how much deposit they should be considering putting forward at the land purchase stage, how much they need to hold back for some of the works and work out the project with them in partnership so that you’ve got a really clear timeline and stress-tested cash flow. We can then see what happens if there’s a bit of a move in interest rates, if there’s a bit of a move in property prices, if heaven forbid costs start to rise, so that we can see what the sort of risk appraisal is and advise on the project in a very hands-on way to try and mitigate against nasty surprises.”
Expect Some Challenges During the Build
All projects will have aspects that change. Jon cannot remember any project that has gone exactly as planned where the budget has been spot on. Of course sometimes that can be in your favour and savings can be made on what you thought you were going to borrow. Assuming that a 10% contingency will get you out of all problems could be a mistake.
Stress-Testing is to Help Not Hinder
Applying a stress-test on a project and considering different eventualities makes sure that both the borrower and the lender have got a good understanding of what’s going to happen. It brings clarity over who’s going to be doing what and how things will be certified.
Develop a Personal Relationship with Your Borrower
Jon's final bit of advice is to get to know your lender and to have a personal relationship where ever possible. Going through a broker will put you at arms length from whoever is providing the finance. As well as adding an extra layer of cost, you don’t get that rapport to be able to tackle problems that may crop up during the build.
Visit the Ecology Building Society for more information and case studies.
How are you going to finance your build? Have you got a healthy contingency planned?