Self Build Mortgage is a very specialist area, not many brokers are comfortable dealing with such projects – How are you different?
I’ve been arranging mortgages for 25 years. I’ve dealt with most situations, but this has a personal connection for me. It was a personal interest as well as a professional one. I needed to understand myself in order to make sure I could get the best self-build mortgage out there.
I remember the apprehension before I embarked on the project, the constant stress throughout it. So, I can speak as somebody that’s got the t-shirt and has done it themselves. It’s like anything, it is quite an individual niche and there’s not that many people that want to do sales builds on a weekly basis. Having built up that level of knowledge, I’m quite happy to share it, but I can understand why people don’t want to invest the time, energy and effort into finding out for perhaps one or two cases a month.
How much deposit would you need for a self build?
That’s the sticky point for a lot of clients. If you’ve got a relatively high mortgage on your existing property, then affordability will become quite tight. There’s not going to be an effect in the deal to be able to get the funds out of their transaction to use going forward. So as a general rule of thumb, we work on a 30% basis. There’s a 30% deposit to buy the plot of land and then we can work with architects, surveyors, structural engineers to try and get costings, to work to a level that the builders can be happy with. But really a 30% deposit is what you’re looking at. That’s the magic number.
Can you get a self build mortgage as a first time buyer?
It is not common. Candidly speaking it would be something I would probably steer away from. I would say that for the vast bulk of our clients, it’s a second purchase, possibly even third purchase, not an only one straight off the bat. That said it’s not impossible, especially if you are working in a related trade – for example carpentry or building work.
As it is a more complex process how do you get to an exact cost at the beginning of the project?
What we look at is the purchase price of the property. Very often people will be selling a plot with outline planning permission, not always detailed planning permission. So, that will enable the builder to have a rough idea of what they can get on the plot of land, but not certainty.
From a certainty point of view, it is a line in the sand that does tend to move a little bit. And historically you always find the more into the building you get, the more costs seem to occur. So we always suggest a good 10-15% contingency fund to make sure that you’ve got a bit of breathing space. This is where it’s so important to get your builder on board right from the beginning. Having a watertight contract.
We can be reasonably accurate in what we do. When you do renovations, you might not allow for perhaps a new roof and all of a sudden they realise there’s an issue with the roof, so that has to be funded somewhere.
More often than not, it’s the cosmetic or nice to have items that start creeping up. If you have £2,000 to spend on sanitary ware that sounds a lot of money, but when you start going into places to buy them, for £3,000 you can get a much nicer one than you can for £2,000 and these little costs start adding up.
When do you start to pay back the mortgage on a self build?
Exactly the same as a normal purchase. When you offer on the property it means nothing at all, not until you exchange contracts when you know when you’re going to take ownership of it. Normally when you pay the deposit and you complete, that’s when you start the ball rolling. So when a self-build is normally approved it’s done in several tranches of funds. The first tranche is what they need for the land purchase. Once you draw that down, that’s when you start paying interest on that particular tranche. The second fund then will be foundations. And again, once that money is spent, that’s when you request the surveyors to come out to confirm that the money’s been spent, and then they’ll release the second tranche to you. You pay for it in stages when you draw down. A little like a giant overdraft when you start using it, you start paying for it.
Are self-build mortgages more expensive than a standard mortgage?
We’re totally independent. There are 127 different lenders out there, there’s probably 10 and 15 that are interested in self-build transactions. Straight away, the market’s contracted quite a lot. Some of those lenders lend in arrears, you get the work done and then you get the money back from them. Some of them lend in advance, so they’ll fund the work that’s happening. It depends very much on the criteria of your own deal, but there will be a premium attached to a self-build.
Speaking of my personal experience of self building. One of our boundaries to self building was that we were able to remain in our existing home whilst the work was being undertaken. At that time, we had two mortgages. What the self-build company did was allow us to put the self-build mortgage on an interest only period of 12 months. That made the cost more affordable. I could still afford to pay my mortgage in my main residence and there was a little left over to be able to live a happy life.
Once the building is signed off, you’re then able to refinance it onto a traditional mortgage. Although each case is different you may find your rate maybe 4%, whereas a traditional mortgage is sort of one and a half percent. The sooner you can get the build done and get your sign off certificate, the quicker it’s going to be to get you on a better rate. The long term plan is to use the self-build to get you in the house then exit that and refinance it with a more traditional route.
As soon as you’ve got the sign off certificate in your hand, you’re good to go. I always say to clients, don’t rush it. I know this temptation is there to try and get through as quickly as you can, but there are little things to take into consideration: A builder has no interest in making sure the garden looks pretty Once the builder has completed their job and before the surveyor comes, you can get a couple of weeks just to be able to tidy it up and make it look like a home rather than the house. That then normally helps with valuations in property.
How early on in the process should I speak to a mortgage advisor?
The sooner we can get engaged the better, and the more realistic costs we can come up with and let you know.
Can pensioners get a self-build mortgage? What do lenders look at in terms of the age?
It depends how it’s financed. There’s a variety of ways to go, but you may decide to bridge the initial transaction in which doing so you negate the income part of the transaction. So in other words, if there’s enough equity in the property or the plot, we’ll be able to do something called retained interest.
A simplified example:
Let’s say the mortgage payment is £1,000 a month and you think the build is going to take 10 months, the builder would retain £10,000 of that advance and then in effect, pay the mortgage from that £10,000. By the end of the transaction, you then need to have an exit strategy. That could be the sale of your other property, but in doing so age is irrelevant.
With a standard mortgage you generally use four/four and a half times your income to calculate what you can borrow, is it different for self-build and traditional mortgages?
It is a little bit different because the cost of the existing mortgages has to be accounted for. If you decided to sell your house and buy a property, you could for example, put a caravan in the garden and start and that will be under it differently to if you wanted to retain your house or you wanted to buy a rented property. You’re going to move into rented property whilst you’re having the build then. Income calculations are a little bit more complex in this type of scenario. The best advice is when you know you are keen to go down this route, sit down with someone and make sure they’ve got a good understanding of self-builds. Then they’ll be able to point you in the right direction.
If you’ve got a mortgage broker who is a specialist that has done it before, they’re aware of all the pitfalls that you’re going to be going through, the stresses and strains. That puts me in a very good position!
Make sure the broker that you go to has full access to all lenders who deal with self-build mortgages.
If you can pair up with any connection. For example, the mortgages I’ve arranged, have actually built through the same builder. Again, that level of trust is there already. I am able to point them in the right direction and the builders know what they need to do to be able to get stage release payments.