publication date: Apr 3, 2009
author/source: Kate Faulkner
To finance your self build project, you need to make sure that you understand the differences between borrowing for a ready built home and borrowing to build.
When you finance an existing home, it's easy to estimate the value of the property and easier for lenders to work out how much risk they will be taking on when lending you money. Once you agreed a price and exchanged on an existing home, then you can go ahead with the purchase, the lender releases the money and you move in and start paying the mortgage.
With a self build, you need to borrow money in stages. For example, initially you need to buy the land, then it may be several months before you clear the plot. The next stage is the ground works for foundations and drainage and after more months waiting you finally start to see your property being built!
As a result, many lenders will not want to lend on self build projects as it requires specialist knowledge and experience and it's more work than a standard mortgage. So follow our three step guide to help you finance your property in the best possible way:-
Step One: Understand self build mortgages
Make sure you approach specialist and experienced lenders that will let you borrow money at each stage of the land purchase and build. Lending in stages often means that you can stay in your current property and carry out much of the build before you move into your newly built home as the costs of the mortgage start off with mortgage payments for the cost of the land, then a bit more for clearning the land and groundworks etc.
Step Two: Scrutinise the finance costs
Unfortunately you are likely to have to pay more for your self build mortgage, so it's important to compare costs from different lenders. For example, the lending criteria and associated costs for self build mortgages are typically:-
5% deposit for the land and build, providing that when you finish the mortgage is only 75% of the final valuation.
You can't now secure a self build mortgage on a 'self certification' basis.
Typical fixed rates for self build mortgages are around 5-6%.
Fees for securing the mortgage range from £1,000 to 1.5% of the amount you borrow.
You are also likely to pay a little more on legals and survey fees too, so it's worth budgeting around £2,000 for these essential items.
Step Three: Find a lender that will be efficient and flexible on payments
When you are borrowing money in stages for building a new home, it's important to make sure you work with a lender that understands you need your money quickly, in advance of each stage of the build. You also need to find a flexible lender that understands you may go over budget and need to re-negotiate an increased loan during the build. It's no good working with a lender that takes months to make a decision. If they are too slow, you may lose your builder if you can't pay them or might not be able to pay for essential materials.
To ensure you secure the right finance visit our self build finance section and don't forget you'll need specialist insurance to insure your plot, the build and your new home! Visit our building warranties section for more information.
To find out more about self build take a look at our Develop and Build section, read our Top 10 Tips about Building a Home and our Guide to Building a Home. Do you have a property question you want an unbiased and independent answer to? Contact the Designs on Property team or call us on 0845 838 1763.