Burger – The Self Build and DIY Bricklayer

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The Essential Guide » Design and Finance » Funding & Financing Your New Self Build Project

Financing your project - Self Build / New Build:

Introduction:

mortgage application for self build project

There are literally hundreds, possibly thousands of “finance products” on the market which are suitable for purchasing land or property.

To find the right one for you, you will normally approach either a Building Society or a Financial Advisor ( you can find Local Financial advisors in the directory section of this site).

Whoever you contact, they are all going to want to know first of all, what your present financial situation is, and therefore will need answers to most, or possibly all of the following questions:

1) Do you own the land on which you want to build? – Or do you need to find and buy it?

2) Do you have funds of your own, enough to either to purchase the land without the need for funding, or for the deposit on the land?

3) Do you have a property to sell, and if so will you be selling it before you build, or do you want to stay in it whilst you build?

4) Do you have adequate funds to get the design and planning work completed without needing assistance?

5) Can you start the main building works before you require funds?

Generally, as long as your credit rating is reasonably “positive”, then whichever of the above questions apply to your situation, you should stand a good chance of getting at least some funding to help you with your project.

How Self Build and DIY “Project Financing” has changed:

The financing of these sorts of projects has come a long way since the 1980’s when most lenders were very cautious about providing finance.

As the market started to grow into something that lenders could not ignore, many of them decided to “dip their toes in” and see how it went. - Many of the main “players” in the finance market place found this sector to be a good area to be involved in. - Why? - raining money

Well, by the very nature of what a Self Build project is all about, the end value of the product is pretty much always going to be significantly above the mortgage borrowing level. - Therefore they thought that their risk was relatively low.

All of a sudden, from the early nineties, there were Self Build mortgages being offered everywhere, and to everyone and anyone! - With each new product that came into the market, trying to outdo the others.

It was great for a time, - until the economic conditions turned a little more negative, and the lenders also found that some of the people they were lending to, were not actually doing a very good job of using the funds wisely to create the “High end value, low mortgage” property that they expected them to. - Numerous Self Build projects were failing.

The lenders had a rethink, and things changed.

Now, to get a mortgage for your project you had to start to have a bit more of a sensible “plan of action”, and you had to prove to a certain point, that YOU as individuals could “pull the project off”.

This settled the whole of the market down to more like it is today. - A market which can offer a good range of fairly flexible Self Build Mortgage options, which will be offered based on a mixture of any or all of the following factors:

1) Your earnings

2) Your available cash funds

3) Your present property value / mortgage

4) Your knowledge of the Building Industry

5) The likely end value of your new home

There is actually a better choice for “Self Build Mortgages” in some respects, than there is for a “Standard Mortgages”, in as much as:

You can come to the project the normal way, with a deposit, and borrow a percentage of the cost of the land and the build costs.
OR: You can start with minimal funds available, and, as long as the lenders are happy with your “overall” position (the list just mentioned), still actually plan a project and get it going. - If you have as little as 5% of the cost of the land available, it may be possible that you are able to go out and look for land, having already secured, in principal, the funding you need.

Just as with standard mortgages, each type of Self build mortgage will have a different set of conditions and figures attached to it. You may be wise to compare a number of different lenders products to find one which suits you best.

Basically, there are two main types of “Self Build” mortgages on the market:

The “In arrears” mortgage:

This type of funding may suit you if you come to the project and either own the land, or already have enough funds for the deposit for the land, and possibly enough also to start work on the construction of the property.

It may be that you have obtained Planning Permission on some land you already own, or have possibly already sold a property and have the funds readily available to go towards this development. Or you may simply have funds available from another source.

The type of mortgage you will need in those circumstances will most likely to be the one which works “behind the progress of the project” itself. (In other words, you do the work and then get paid afterwards).

In this case, you will apply for a mortgage which will usually pay the “balance” of the cost of the land after you have provided the deposit (sometimes up to 95% of the cost of the land).

You then have a “standard system” to provide funds for you to be able to complete the rest of the project:

The “Stage Payments (as they are titled), for the construction of the property, start to be released AFTER you have reached a pre set “stage” in the construction process, normally after pouring the foundations, or occasionally a little later, maybe once the floor slab has been poured.

Further funds are then released at other stages up until “Final Completion”.

As you complete a stage of the build, you simply request a valuation (for which you normally have to pay), and assuming that everything is satisfactory, your funds are normally released fairly quickly.

What this system in fact does, is reimburse you after you have done the work, and in some cases you need to have a substantial amount of cash funding, both to provide the deposit on the land (maybe only 5%), and fund the first part of the construction process.

This is a system that suits some people, but not all.

(Note: If you have a property which you intend selling after you have completed the new build, it is possible that you could raise funds from it to finance the deposit and the start of the work, without moving out whilst you build your new home- Talk to your Financial Advisors to find out how this works).

Maximum borrowing on this sort of mortgage will presently (late 2009 ) be between 50% and 80% of the VALUATION (not the cost ) of the land, and then the same on the property as it is being constructed. (Note: If you are reading this more than a few months after it has been written these figures may vary as the housing market conditions change).

The “Up Front” mortgage:

This type of mortgage is not as widely available as is the arrears mortgage, but may well be more suitable for many Self Builders, especially younger people who may not have a lot of spare cash, and who have not had the chance to increase their property “equity values” to be able to sell what they presently own, to provide deposits and working capital for the project.

The way it works is basically the opposite of the previous example. This mortgage provides funds BEFORE they need to be spent.

The funds will provide up to 95% of the COST (not the value) of the land.

The once the project starts, it will also provide up to 95% of the COST of the build.

The strength of this type of mortgage in the eyes of many Self Builders is the fact that they receive the funds before each section of work starts. – This can mean the difference between a project being “possible” or a “none starter” in many cases.

In theory it gives the Self Builder the ability to “create substantial equity” very quickly. – Sometimes in less than a year (which by staying in their existing property, they could only hope to create over maybe 10 years or more).

The Mortgage company takes a bit of a risk by providing 95% of the cost of the land, which if the project stalled at an early stage they may not fully recoup. However the chances of this happening are slim, and once the construction part of the project gets underway, the value of the property will generally increase at a far faster rate than the “upfront” payments made on the mortgage. With the value of the completed property often being around 30% higher than its total cost.

What are the “Stage Payment” points for Self Build Mortgages?

The stages at which the payments for either type of mortgage will differ from product to product, but I’ll list here a rough guide for both “Timber Frame” and “Traditional Build”:

Timber Frame:

1) Purchase of the land

2) Foundations completed

3) Timber Frame erected, or possibly “Wind and Watertight”.

4) First fix electrics / gas / plumbing complete, or “dry lined / plastered”.

5) Complete (final certificate issued).

Traditional:

1) Purchase of the land.

2) Foundations complete.

3) Wall plate level, or “Roof complete”.

4) First fix electrics / gas / plumbing complete, or “dry lined / plastered”.

5) Completion (final certificate issued).

Some lenders will use those “payment points” as a “guide line” rather than them being “cast in stone”.

If you have good reasons for changing the stage payment points, they may be able to “design” a mortgage around your project specifically. – There may also be the option to add an extra “interim” payment somewhere along the way if you find that for some reason your cash flow is under pressure. – As long as the cost and value figures are still “sound”, this can make sure that the project succeeds, and is seen as a logical move in many circumstances.

Agreement "in principle":

It’s also worth trying to get your borrowing requirements, at least “in principle” sorted out PRIOR to finding a suitable property.

Some lenders have a system where you go to them and make an application, just as normal, BEFORE you start to look for property (or land).

Based on the information you give them, they may then agree to “lend in principle” a certain amount of money, based on your own personal financial situation, and subject to a valuation on the property you eventually want to buy. – This gives you the advantage when you view property, of saying to the seller “We are able to proceed straight away”. – This can then often help you to negotiate a better price.

Conclusion:

Mortgages are “quite a scary” area to a lot of people. – They don’t need to be. – As with just about every section of your DIY Building project, if you do a bit of “homework” you soon start to see how it all works!

Discuss the flexibility of the mortgage products with your agent or the Mortgage provider directly before you decide which will be best for you.

Self Build projects can throw up many unexpected factors which all have to be overcome in order to achieve success. Flexibly funding can be critical when trying to sort out practical problems on site.

You will find plenty of “Financial Advisors” listed in the Trade Directory on this site

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