Breaking Ground: Financing Your Dream Home with a Self-Build Mortgage in the UK
Financing a Self-build home in the UK
Last year one of my self-employed clients contacted me. He and his wife had decided to build their own home and needed to discuss how to get a self-build mortgage.
First things first – we need a plot of land to build on!
They found the plot of land. But hadn’t finalized the purchase as they aimed to secure the funding for the project beforehand.
So, we got to work on sourcing a self-build mortgage. This would enable them to both purchase the land and fund the development of the project.
What about the self-build mortgage?
It’s important to remember that a deposit is still require with a self-build mortgage.
My clients have their own businesses and are both limited company directors. As a result, another quirk to this application was that we needed to find a lender who could utilise the most recent years profit from all of their businesses towards mortgage affordability.
How does a self-build mortgage in the UK work?
Usually, self-build mortgages involve ‘stage payments,’ where the funding is released gradually as the project progresses. This can be done either in arrears or advanced payments.
Payments in arrears involve paying for the completed phase of work, followed by the release of funding to cover the costs.
Advanced payments being where the funds are released in advance of the work being done based on pre-agreed costing. The latter tends to be the most popular method, although rates can be slightly higher.
The project stages and costing is covered during the underwriting process. This is so that each stage of funding is pre-approved before anything starts. This provides the borrower with a lot of certainty around how much they will have to work with at each stage of the build.
There is minimal ‘security’ for the lender against the debt on a self-build mortgage, as the property doesn’t yet exist. Therefore, the underwriting side can be thorough. The lender will want to be absolutely sure and comfortable that the project will reach completion. So, be prepared that the application side of a self-build mortgage can take a little longer than a normal residential mortgage application.
We did it!
Ultimately, we managed to get a mortgage offer agreed for my clients to provide funding of £750,000. This was to be released in 6 stages, starting with a large chunk to help with the costs to buy the land. They have since completed the purchase of land and the first stage of building their forever home will be starting shortly.
