How to Finance Your Self or Custom Build
One of the most common questions from potential self or custom builders is “how do I pay for it?”.
We asked Chris Martin, Head of Products at specialist mortgage broker BuildStore to outline the financing options.
Cash
You will usually need some cash to put towards your project – you may be fortunate enough to have enough to cover the whole project – from savings and/or a family gift, or you might have enough to fund part of the cost and need to borrow money in some other way to cover the balance.
If you already own your land or plot, or another property with little or no mortgage, then it may be possible to use this as your deposit and avoid the need to eat into existing savings.
Selling another property you own
If you have another property with equity in it – the value being less than any mortgage - then you could choose to sell this property to fund some or all of your project costs.
If this is your current home, then you would need to find somewhere else to live while you build your new house. Some people move in with family temporarily - but remember this can be stressful and many builds take longer than expected!
Many self builders will choose to rent a property temporarily, however this can be relatively expensive, along with the hassle of moving and potentially storing possessions if you move to somewhere smaller to keep costs down.
If you choose to sell a Buy to Let property to help fund your build, remember you’ll no longer receive the rental income and there could be tax implications on the sales proceeds.
Remortgaging another property you own
If you own another property – perhaps your current home or a property you rent out - and you have little or no mortgage on the property, then you could consider arranging a mortgage on it or increasing your current mortgage to raise some or all of the funds for your project.
We would recommend that you speak to a specialist mortgage adviser who can go through your options. If you are planning to borrow money from another source as well – for example a self build mortgage, then any potential lender will want to take into account the costs of all the borrowing you are arranging when assessing your application.
Arrange a self or custom build mortgage
Self and custom build mortgages are secured on your plot or renovation property and have been specially designed to fund a self or custom build project - funds are released in stages as you progress your build. Have a look at our dedicated self and custom build mortgage guide here.
Short Term borrowing
If you expect your project to be completed in less than 12 months, it may be useful to consider a shorter term bridging or development loan. Interest rates will be higher than other kinds of borrowing, but if you only need the loan for a few months - perhaps while you wait for the sale of another property to go through, or have a standard mortgage organised to take over once you have finished a light renovation project - then this option could represent good value compared to tying into a self build mortgage for a longer period.
This type of loan may also be a suitable if your income or age means you don’t qualify for other forms of borrowing but you’re happy for interest charges to be rolled into the loan.
Typical products will allow you to borrow up to 50% of the cost of your plot and up to 100% of your build costs, released in stages as your build progresses. If you already own you plot, the you may be able to borrow enough to cover all of your build costs up-front.
Raising funds for your build in this way does have extra risk as there can be a lot of additional charges if you don’t repay the loan within 12 months, so you will need to be sure that you can repay the mortgage on time.
The Help to Build government scheme
The Help to Build scheme is a Government initiative designed to make it easier for people to build their own homes via the self or custom build route. Through the scheme, self or custom builders can apply for an equity loan for between 5% and 20% of the total estimated cost of the development. In London, you can receive up to 40%.
If you qualify for the loan, you can spend up to £600,000 on your new home, but this must include the cost of purchasing the land (if you don’t already own your desired plot). You can spend up to £400,000 on the cost of building the home.
You can apply for a Help to Build loan if:
● You’re over 18
● The home you build will be your only home
● You have a deposit of at least 5% of the land and building costs
● You successfully secure a 95% self build mortgage from a Help to Build-registered lender
How to apply for Help to Build:
- You must secure a self build mortgage. You can find a Help to Build-approved mortgage lender yourself, or you can appoint a broker to find one for you.
- Apply for the scheme online here
- If your application is approved, you’ll receive your equity loan.
When it comes to repaying the loan, the repayment amount will be based on the market value of your home, including the value of the land. This means that if your home increases in value, so will the amount you’ll need to repay.
The loan is interest free for the first five years; you will be charged interest on the equity loan from the sixth year.
If you’d like tailored advice regarding ways to fund your self or custom build project, then speak to the experts at BuildStore, who will be able to guide and advise you on whatever you need.
What is the Home Builders Fund?
In order to increase the number of self-built homes in England, the Government introduced the Home Builders’ Fund in 2016. The £3 billion fund provides two different types of loans:
Development finance - a tailored loan to cover the costs of development. This form of finance is designed to help smaller developers who are struggling to access private financing for their project.
Infrastructure finance - a tailored loan for the preparation of site and land. This may include:
● land preparation and enabling works
● provision of on- and off-site transport infrastructure
● provision of education facilities
● provision of placemaking and community facilities
The Home Builders Fund provides a number of benefits, including:
● Short and long-term loans between £250,000 to £250 million
● Five-year term for development finance
● 20-year term for infrastructure finance
● Pre-agreed interest rate
The fund also provides non-financial support where it’s needed.
The HFB is available for various building projects, not just someone building their own home for a one-off project. Small builders, custom builders and community builders and large developers alike can use the fund.
Private sector businesses can only use the fund for financing certain projects. They can bid to use the fund for building affordable rented properties, shared-ownership homes and rent-to-buy homes.
You will have to meet certain criteria to be eligible for funding from the HBF. The full criteria can be found here.
Guide to Managing Money course covers all of the schemes available, as well as looking at how to raise finance and budget successfully.
