How to raise funds for your project
Expert advice on self-build mortgages and other loan options
It pays to plan ahead to determine the best option for financing a self-build, major renovation or extension – especially given last year’s turmoil in the financial markets, higher inflation, interest rate rises, and some mortgage products being withdrawn.
Nevertheless, experts insist that plenty of choice remains. ‘There are more than 20 institutions lending on self-build projects,’ says Mary Riley, director of Mary Riley Solutions.
Self-build mortgages are available for substantial renovations, conversions and extensions as well as building a home from scratch.
‘Funds are released at crucial points in the project, such as when the foundations are finished, the property is built to roof level, it’s made watertight, the first fix is complete, and so on,’ says Charlotte Grimshaw, head of mortgage sales at Suffolk Building Society.
‘One benefit of this type of mortgage is that interest accrues when the money is released, as needed. Each stage is subject to checks by the lender, which may appoint its own valuer to visit the project and assess progress.’ Once the build is completed, there’s the option to switch to a conventional mortgage, if the terms are more favourable.
Value-based or cost-based loan?
Self-build mortgages are either value-based or cost-based. Value-based products release money in stages linked to the lender’s estimated value of what’s on the land, such as the land plus foundations, or the land with a house built to watertight stage.
These mortgages are tied to the value of the house when it’s completed – so if the housing market dips in the middle of the build you may receive less money from the lender than had been budgeted for. The other loan type is known as a cost-based mortgage, which provides funding according to the cost of each build stage, rather than the uplift in the project’s value as you go along.
Factors to consider
Buildstore is the only broker to offer valuation-based and cost-based mortgages. The latter are widely available through various building societies.
As property prices have fallen in some parts of the UK, cost-based is a lending option worth considering. ‘Valuers are being cautious about the anticipated end value of a newly built home,’ says Mary Riley. Some products offer incentives for eco-friendly projects.
The Ecology Building Society rewards energy efficiency via its C-Change discount, offering a percentage off the company’s standard variable rate depending on the project’s efficiency rating on completion. It also gives cashback on projects with a heat pump – £500 for an air-source heat pump, or £1,000 for ground-source – with its self-build, renovation, conversion and shared ownership mortgages.
Budgeting and contingency
When calculating how much you need to borrow, add up every estimated cost associated with the project, including professional fees and landscaping, and include a contingency. Prior to the rise in inflation, a 10-20% allowance for extra expenses was acceptable, but subsequently 20% is the bare minimum.
And where it may once have been possible to depend on fixed costs, this is ever more unlikely. ‘It is almost impossible to get a fixed-price contract from a main contractor,’ says Mary Riley. ‘If you do, scrutinise it carefully. Should material costs exceed a certain percentage some contracts have a clause making you liable for all or a percentage of the increase.’
The maximum borrowing limit is usually 4.5 times a single or joint income, but your outgoings are assessed and will have an influence on your application. ‘Lenders have tweaked their affordability calculators to take into account increasing energy bills and the basic cost of living including food, commuting to work and so on,’ Mary explains.
You can take steps to improve your chances of getting an application approved. ‘Tidy up your discretionary monthly expenditure so you are better equipped to show affordability,’ she says. ‘Do not overuse credit cards.’
Engaging a financial adviser with a depth of self-build borrowing knowledge will save you time-consuming product research and avoids error. ‘I helped someone who miscalculated how much they’d be able to borrow by £125,000 because they’d failed to factor in existing debt,’ says Peter Hunt. ‘The project had to be scaled back to remain affordable. Without my advice early on, it would not have been completed.’
Find the best match
Deciding which product to go with is more complex than with a conventional mortgage. ‘The rate of interest and arrangement fees are not always the most important factors,’ says Mary Riley. ‘Of equal importance is whether the lender’s payments are well-tailored to the stages of your build and whether it accepts your method of construction.’
Your broker will advise, or do your own research – some lenders have fixed stages, some are more flexible and will work out the stages on a case-by-case basis tailored to your specific project.
The structural build method and materials you choose have an influence on your borrowing options. ‘The proposed structure and design are key elements of obtaining a decision to proceed from a mortgage lender,’ says Peter.
With a modular home built in a factory and assembled on site, some lenders require the system to be accredited by the Buildoffsite Property Assurance Scheme, so your mortgage options may be limited. Lenders are open to timber-frame construction, but you may be subject to additional rules on features such as cladding and flat roofs.
Apply as early as possible
It can take up to five weeks for a lender to decide on an application. ‘Self-build mortgages tend to take a little longer than conventional mortgages to reach a conclusion, so approach the financing of your project at an early stage,’ says Dan Capstick, mortgage manager at Ecology Building Society.
‘Lenders have different requirements, but at Ecology you will be expected to own the land, have outline planning permission (OPP) and know your estimated total building costs.’
Loans and more
Banks and building societies offer home improvement loans for projects such as renovations and extensions. Repayment schedules are shorter than mortgages and the maximum amount lenders will loan is smaller – up to around £25,000. The loans are unsecured, but another option is to remortgage and release equity from your home.
Borrowing from family or friends is another option. It’s a good idea to put an agreement in writing, which benefits both parties, and clearly set out expectations. A legally binding template is available to download for a fee from Net Lawman.
The government’s Help to Build scheme offers equity loans based on the estimated cost of the land and the build, and can be worth between 5% and 20% of the total cost – up to 40% in London. This is capped at £600,000 for the land and build, and the construction cost must not exceed £400,000, even if the land is already owned. Find out more by searching Help to Build on gov.uk.