2 February 2023

How to fund your self-build dream house

By Self Build Zone

For most people getting their finances in order is the natural starting point when embarking on a self build project. You’ll need access to money to buy a building plot, to pay for professional services such as architectural designers’ fees and any site surveys required, and to fund the build itself. If you need to borrow money, then finding the right mortgage for your build is crucial to ensuring the success of the project. Self build mortgages can release funds at set stages to help you build your dream home.

How to fund a self build house project

There are various ways to fund a self build house build. The money may come from savings, equity in your existing home, through a self build mortgage or a combination of all three.

The different ways in which this money can be released and your choice of product will depend on your own particular circumstances. This is why it is important to speak to a self build finance expert to discuss your options as early in your project as possible. Surprisingly, few high street banks provide formal facilities for self build finance, so you’ll likely need to approach a specialist provider.

What Types of Self Build Mortgages are Available?

There are two types of self build mortgages that you could choose from:

Arrears mortgages: If you have a large amount of cash to hand to finance some of your self build home, an arrears-type self build mortgage is your best bet. These offer payments in stages after each stage of the build is complete, meaning you front up the money for the stage and are ultimately repaid.

Advance mortgages: For those reliant on the mortgage to fund each stage, an advance mortgage releases payments at the start of each stage. This will mean you don’t require short-term or bridging loans to cover the build costs upfront if you were to take out an arrears self build mortgage.

For many people, this type of mortgage is understandably advantageous, offering help with cash flow; however, there are fewer providers who offer this kind of mortgage, and the rates may not be as competitive as an arrears type mortgage.

Some lending institutions lend on the land purchase or existing property and at key stages during and on completion of the build project.

This can vary from:

· 75-80% of the purchase price or valuation (whichever of the two is the lower)

· Up to 80% of build costs

· Up to 75% of the growth in value of your project at key stages during construction

· Some lending institutions do not lend on land, but they will lend during the build period.

Will Help to Build Make it Easier to get a Self Build Mortgage?

Now the prospectus for the government’s new Help to Build scheme has been released, there is further information about how self builders can use it to help finance a project.

The scheme itself does not offer self build mortgages. Through Help to Build, you can apply for an equity loan from the government of between 5% and 20% of the estimated build cost (up to 40% in London). However, you’ll still need a self build mortgage in place to use this scheme, and you’ll also need a mortgage from a provider registered with Help to Build.

You only get your equity loan and start to pay fees for it after you’ve built your home, after which the government will pay your mortgage lender the equity loan amount offered to you, and your self build mortgage will automatically switch to a repayment mortgage.

Do I Need to Have Insurance and Warranties in Place?

A bank or building society may not release initial funds until you can demonstrate that you have a 10-year structural warranty policy in place. When taking out your warranty, it’s also an excellent time to ensure that you have the right site self build and renovation insurance policy in place to give you peace of mind should anything go wrong.

Anyone undertaking a build project, whether borrowing or not, should have both a self build warranty and self build insurance in place prior to starting work on site.

Subject to affordability, banks and building societies are keen to lend on residential construction projects, providing you have carried out due diligence and engaged the appropriate team(s) to achieve the successful construction of your new home.

Further info on Help to Build https://nacsba.org.uk/campaigns/help-to-build/

Further info on self build funding options: https://www.buildstore.co.uk/mortgages-finance/project-types/self-build-mortgages https://www.homebuilding.co.uk/advice/self-build-mortgage

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