A guide to self and custom build mortgages
If like many self builders, you don’t have enough cash in the bank to fund your build or another property you could raise money on (see our How to Finance Your Self Build factsheet) then you’ll need to consider arranging a self build mortgage.
We asked Chris Martin, Head of Products at specialist mortgage broker BuildStore to explain how self build mortgages work and how to go about applying for one.
Self or Custom Build – what’s the difference?
Self building is where you purchase or are given a plot - perhaps by a family member - and you organise to build your own individual home. This doesn’t mean you have to do all the work yourself! Most self builders will organise a main builder, architect or project manager to organise all the different trades to get the house built. Some self- builders are more hands-on and do some of the project management or work themselves and some will choose to arrange one builder to build their home completely for an agreed price – known as a “turnkey” build.
Custom building generally means buying one of a number of plots on a site which may have had services or even foundations already installed. The landowner will often already have obtained planning permission and there may be a main builder in place who will look after most of the building work for you. There may be pre-agreed house designs for you to choose from with various final design options so the house is still personal to you. Sometimes you might agree with the main builder to finish the house to an almost complete stage for a fixed price and you then take over and manage the internal work.
Custom build can be a great way to get the individual home you want, whilst taking away a lot of the hassle of arranging your own build from scratch.
From a finance point of view, there is little difference in the process to apply for a self build mortgage compared to a custom build mortgage or the products available. Demonstrating to a lender that your expected build costs are realistic might be easier with a custom build, as more of your costs are likely to be agreed up-front with the site developer.
Where do I go to get a self or custom build mortgage?
Most self build mortgages are provided by regional Building Societies whose more manual approach to assessing applications fits well with the more complex nature of self building.
There’s a lot of choice and wide variety of features and benefits and we strongly recommend that you speak to a specialist mortgage adviser like BuildStore who has plenty of experience in successfully guiding clients through the lenders and products available.
How do self and custom build mortgages work?
Like all mortgages, the lender wants security for their loan so they’ll place a legal charge on your plot or property. Unlike other mortgages, the plot itself probably won’t be worth enough to cover the whole mortgage you need, so the lender will release money to you at agreed stages as you progress your build.
It’s really important when choosing a self or custom build mortgage to understand when you’ll get money from your lender and how the amount you’ll get at each stage is worked out. Getting the money you need at the right time can make the difference between finishing your build on time or having cashflow problems which cause delays, stress and even more costs.
There are a number of different styles of mortgage available - which one is most suitable for you will depend on the cash you have available and the kind of build you are undertaking. The options are outlined below:
Cost-based or valuation-based borrowing?
Some self and custom build mortgages rely on a valuation of the site to decide how much can be released each time you ask to draw down some more money. This is usually between 60 and 80% of the valuer’s assessment of the site value. This can create a lot of uncertainty as you don’t know how much you will be able to draw down. The work you have done and money you have spent won’t necessarily be reflected in the valuer’s calculation of the site value at that time. Unless you have plenty of cash of your own available, this could mean that you don’t get the money you need to cover contractors’ costs or materials you need to pay for, running the risk of bringing your build to a standstill.
Cost-based self and custom build mortgages work differently - there are no valuations when you request more money and the amount the lender releases to you at each stage is directly linked to the cost of the stage of work – some lenders release up to 95% of the build cost. All releases are agreed during your mortgage application so there is no risk of getting less than you expect.
Richard Crisp, Commercial Development Executive at Mansfield Building Society commented: “Having a self build mortgage where the stage releases are directly linked to the cost of each element of work can give you real peace of mind, knowing you will have the money to buy materials or pay contractors at the right time.”
Money before you start work or after you complete each stage?
Some mortgage deals (including all valuation-based mortgages) give you money when you have completed each stage of work. These are known as “arrears stage payment” mortgages. This may work well if you already own your plot or property and can draw down some money based on the value, if you have plenty of cash of your own and you’re building using brick and block where the build costs are more evenly spread through your build. In this case an arrears stage payment mortgage may work if you are confident that you can cover the cost of each stage before drawing down money from your mortgage to reimburse yourself.
If you have less cash of your own, you need your mortgage to fund the purchase of your plot or renovation/conversion project or if your project will need a large up-front payment to pay for a timber frame before it is even delivered to your site, then the ideal solution may be an advance stage payment mortgage.
Advance products give you funds to cover each stage of your project before you start each stage and based purely on the cost of each up-coming part of your build. There are no valuations during your build and each stage payment is agreed as part of your mortgage application so you know exactly how much money the lender will release to you as your project progresses. If you are building with a timber frame, this means you could get up to 90% of the cost of your frame before it has been installed – making it a much more realistic proposition.
How much can I borrow?
Like other mortgages, the amount you can borrow will depend on your income, spending and how much you have outstanding on loans and other credit. As a rough guide, most lenders will consider lending around four and a half times your gross income. However, you also need to show that the mortgage payments will be affordable (including if interest rates were to rise). If you plan to arrange the mortgage over a shorter term – perhaps limited by your retirement age - or you have a lot of credit or above average spending habits, the amount you can borrow may be less.
Sarah Johnson, Director of Lending at Hinckley & Rugby Building Society says: “It’s a good idea to think about if you can repay loans or credit cards and to reduce your spending habits over the three months before you apply for a mortgage as this will demonstrate to a lender that you can manage your spending to afford a larger mortgage!”
The amount you can borrow will also be limited by the mortgage product you choose – many products will potentially provide up to 80% of the value of your completed home, although products providing up to 95% of your build costs and 90% of the completed value are available through specialist advisers like BuildStore.
When will my funds be released during my build?
For a new build project, funds will usually be released at the following stages – either before you start work or once the stage has been completed, depending on whether you’ve chosen an arears or advance stage payment mortgage. If you’re renovating or converting an existing property, the stage release points will be tailored to your build.
What will I need to apply for my self or custom build mortgage?
When you apply for a mortgage, your lender will need information about your planned project and about your income and spending – typical requirements are:
- Plot details including location plan
- Site plan, drawings and specifications – these should be professionally prepared – by an Architect or similar – and scaleable
- Planning permission – many lenders will accept Outline planning permission if you are applying for a mortgage to buy the plot and build your property. If you already own your plot, you will need Detailed planning permission before you apply.
- Cost estimates for your build – your project manager, architect or quantity surveyor might prepare these for you or a specialist mortgage adviser like BuildStore will offer an in-house costings service
- Evidence of your income – usually up to three months’ payslips showing income and spending and your latest P60 if you are employed, or up to three years tax returns or accounts and associated documents if you are self employed
- Evidence of spending – usually up to three months bank statements showing your income, living costs and general spending
- Proof of any funds are putting towards the cost of your project to cover the difference between the total costs and the mortgage you are looking for
How much will my self or custom build mortgage cost?
The cost each month will depend on the interest rate charged for the mortgage you choose, how much you borrow and the term you choose for your mortgage.
Most self build lenders will allow you to pay just the interest each month while you are building your home and you will only pay for the money you have drawn down – this will help to keep your overall costs down when you may still be paying rent or mortgage for your current home.
What fees will I have to pay?
Like most mortgages, you will usually need to pay for the lender’s valuation of your plot and project.
If you choose a valuation-based mortgage, you are likely to be charged for an extra valuation each time you ask for more funds.
The lender may also charge you a small amount for electronically sending money to your bank account when your mortgage starts and each time they release more money.
Many mortgage deals will include a product fee payable when your mortgage starts – this may be a fixed amount or be a percentage of the amount you borrow.
Some mortgages may include a fee (known as an Early Repayment Charge) if you want to repay the mortgage before your initial deal has finished, which may happen if you complete your build quickly and want to move to a new lender for a better deal. Typically, this could be during the first two years and around 2% of the amount you owe. Some lenders will waive this fee if you stay with them for your new deal.
Like all professional advisers, your mortgage broker may charge you a fee for their advice and they should clearly explain their fees to you along with all of the other fees that you would have to pay for the recommended mortgage before you agree to go ahead.
Your mortgage lender will need you to arrange suitable site insurance and an insurance backed warranty for your project – some lenders will accept a professional consultant such as an Architect or Chartered Surveyor to supervise and certify your project and issue instead of a warranty. Before arranging a policy or commissioning someone to certify your build project, check with your broker the lender’s specific requirements.
What happens when I’ve finished my build?
Once you’ve completed your build, your mortgage will usually be changed to a “repayment” loan where some of the payment you make each month goes towards paying off the mortgage itself. At this point you should also be able to change to a standard non-self build mortgage – usually at a lower interest rate. Typically, your lender would need to see your final warranty certificate or Architect’s sign-off and get their valuer to visit your site to confirm the build is complete. Alternatively, you could consider moving your mortgage to another lender for a better rate. If you are still in a deal with your self build lender you may have to pay a fee to move your mortgage – your mortgage adviser will be able to help you work out the best options.
We hope this guide to self build mortgages is useful to you, whether your self or custom build project is just an idea or you’re actively looking to press ahead with building your own home. Self build mortgages are a crucial part of the project, and it’s vital that you’re fully informed and knowledgeable about the details in order to make the best possible choice.
If you’d like tailored advice regarding your self build project, then speak to the experts at BuildStore, who will be able to guide and advise you on whatever you need.
The financial aspect of a self build project can be very daunting, so you may wish to attend the one-day course, The NSBRC Guide to Managing Money, for further advice on all aspects of self build finance. This training course covers all of the schemes available, as well as looking at how to raise finance and budget successfully.