Thomas Honour, mortgage adviser at BuildStore, explains the self build mortgage process.
Interview with Thomas Honour
In this interview we've returned to the National Self Build and Renovation Centre (NSBRC), this time to chat with Thomas Honour who works as an adviser with BuildStore mortgage services. BuildStore specialise in finance for projects, so self builds, custom builds, renovations etc. They have had a presence at the NSBRC since it opened, with a permanent base there for mortgage advisers who also contribute to the seminars on finance.
Consult a mortgage adviser at an early stage
This will help you to ascertain your borrowing capacity and determine whether your budget for the plot and build is is likely to be realistic.
Salary is the single most important factor in determining available finance, but other considerations will include things like ongoing credit commitments, childcare costs and any other significant outgoings.
Each lender is very different but typically they will apply an income multiplier of between 4 and 4.25 times the joint household income, with some treating bonus and overtime payments differently.
There are two different types of self build mortgage product
The main difference between a self build mortgage and a conventional mortgage is the way in which the funds are released. With a conventional mortgage you receive the funds in a lump sum, which together with your deposit, you use to purchase the property.
With self build mortgages the money is released typically in four or five stages, over two phases. The first phase is releasing money to purchase the plot and the second phase releases money to finance the build.
The traditional self build product provides money in arrears of the stage being completed. This works well for people that have larger deposits or who own the land, as they are putting in their own money upfront with the lender giving the money in arrears on completion.
Construction types such as insulated concrete formwork (ICF), structurally insulated panels (SIPs) and timber frame however often require a much larger payment to the manufacturer early in the project. BuildStore have designed their “Accelerator” product to mitigate these cash flow difficulties by giving the money in advance of each stage.
Your mortgage broker has a duty of care to ensure your mortgage is affordable to you
The mortgage broker and lender will work together to ensure that your build costs are reasonable and that they're going to be plausible for the type of project that you are doing. This aims to prevent the need for anyone to return mid-project requesting more funds, with no guarantee they will be provided, and will likely cause delays.
On rare occasions people do return requesting additional funds. An additional loan known as a “further advance” or “additional advance” can be applied for to make sure that the build can be completed, subject to underwriting from the lender.
It's important that budgets are broken down in detail. Sometimes people may not have considered contingencies and additional expenses such as architect fees, stamp duty on land, site insurance and structural warranties. A mortgage broker would rather decline an application upfront than put them in a position where they have a project they can't complete because they don't have enough money.
It is worth bearing in mind that most lenders will have some sort of caveat that the build must be completed within two years.
Since the mortgage market review by the regulator a couple of years ago there is a greater burden on the lender to ensure they are lending responsibly. While Thomas believes that this is right and should be the case, some of their affordability criteria does limit the amount that people can borrow which means they may need to put more down as a deposit.
There are costs to setting up a self build mortgage
This will vary from lender to lender but as with standard mortgages there will be costs to get it set up. These may include:
- An arrangement fee – most lenders will charge this as standard on any type of mortgage
- Valuation fee – this will value the plot based on its value at the time and what you're paying for it. They will also give an end value based on what you're planning to build and what they think it will be worth when completed. There is also a reinstatement value for site insurance purposes.
- Additional fees – some lenders may charge booking fees which are all quite similar but may be named differently.
The job of your broker is to ensure you're aware of all the fees upfront to know what they are, what they cover, what they're costing you and when they're due.
A bridging facility may be suitable for people that have assets but a low income
Thomas uses the example of someone with a house worth £500,000 but a pension income of £10,000, but wanting to borrow more than a typical mortgage would allow them on that income.
Potentially there can be bridging finance secured against the existing home which would enable them to build their house. Money from the sale of their old home can then pay off the bridging facility.
Not all lenders will lend on all construction types
Non-standard constructions can be funded, however “non-standard” means different things to different lenders, so your mortgage broker will find a lender that is suitable for your project. Even timber frame, steel frame, SIPs and ICF constructions are considered non-standard by some lenders.
The reason why some lenders won't lend on less traditional buildings is largely down to re-saleability. The lender is always thinking about if they had to take possession of the property how easy it would be to sell. For properties that might be an acquired taste they will be worried they may not get their money back.
The larger the deposit, the more favourable the interest rates
Typically the minimum deposit required will be around 10% of the overall project costs. The project cost is the combined land and build costs.
For someone that already owns the land outright, the value of the plot can be used as the deposit contribution, i.e. owning a plot with a value of £50,000 will provide £50,000 towards the deposit.
A larger deposit will give more favourable interest rates and may make more lenders available to you.
Find out more
Visit the BuildStore website
Follow BuildStore on Twitter
The Hub update
We'd like to tell you a little bit about The Hub – what it is and why we're doing it.
Support: A self build project can be a long journey so the community side of The Hub is a place to learn from others and be inspired by them.
Information: We're already providing lots of information with our podcasts and videos on YouTube, but this is going a step further by trying to refine and organise it, making a step by step and easy to understand guide of what's involved in a self build.
Videos: There's huge potential for learning by video and here at Regen Media it's what we specialise in.
As content creators and communicators, we can do much more, not only in The Hub, but also by adding free content and perhaps help other people to achieve more and spread their messages further. If we can save you time and money by making The Hub work, then hopefully you're paying for a resource that you're happy with and which is giving us more funds that we can use to create in other areas.