Have you ever dreamt what your ideal home would look like? Well you know what they say about wanting something done properly. Designing and building your own house can make those dreams reality.
There's potential for cost benefits too. Research suggests the average self built house is worth 25-30 per cent more when it's finished than the total cost of build. As a bonus, you only have to pay stamp duty on the cost of the land, and then only on anything above £125,000.
Finally, there’s the psychological reward that such an endeavour can bring. Most of us take enormous satisfaction at adequately putting together flat pack furniture; one can only imagine the gratification that building the family home, brick by brick, from the foundations to the guttering, could provide.
The proposition is clearly an attractive one. According to Government figures over 20,000 people a year choose to build their own home and the numbers are swelling.
Funding your project
However, cost benefits there may be, but the number of people that won't need to borrow in order to go ahead with a self build sit in a fortunate but firm minority. And you can't just go to the bank for a common or garden mortgage.
Instead, some of the banks and some niche providers offer specialist self build mortgages. With these, the money is released in stages as the build progresses, instead of in one lump sum. Time was when just about all of the major banks and building societies offered these mortgages but some have exited the market in recent years. Recession will have played its part in the decline in the number of products available; few industries felt the force of the downturn like the construction industry. There are still plenty of options on the market, though, thanks to the smaller lenders which specialise exclusively in self build.
The maximum Loan-to-Value (LTV) ratio for self build mortgages – the amount you need to borrow compared with the how much the property will be worth when finished – tends to sit at around 75% with most providers. This is lower than with conventional mortgages which in some cases will offer up to 95% LTV. You'll usually need a bigger ratio of cash up front for the initial purchase of the land than for the subsequent cost of build thereafter.
You can also expect to face higher interest rates than you would with a normal mortgage. The discrepancy comes, in part, from the fact that there's so much that could go wrong. It's much more of a risk. Indeed, if you can't prove to the lender that you are adequately skilled to perform the tasks yourself – or that you intend to bring in professionals where necessary – they are unlikely to put the money up at all.
However, there are some benefits to be found over traditional mortgages. Many providers offer the option to pay discounted interest rates in the first few years of the mortgage, allowing the project every chance to quite literally get off the ground. And, as mentioned, with self build mortgages the money is released in stages instead of all at once which will help you to manage your budget throughout the project. Here, there are two options available: getting paid at the beginning of each stage or being 'reimbursed' for each phase as it comes to a close. Either way, most lenders tend to release the money in around five or six pre-agreed instalments to cover specific operations. The lender may stipulate that evaluations of each stage must be completed before the next tranche of money is released.
As with normal mortgages, there are fixed rate and variable rate interest options available, including Bank of England tracker products.
Getting your house in order
It is of paramount importance that you plan your project meticulously before you begin. Everything must be factored in, in terms of materials, operations, costs and timelines, even just to convince your bank to lend you the money.
Most lenders require detailed planning permission to agree a deal, although some say they will take on projects with only outline planning permission. This is in order to help the borrower get moving quickly when an ideal patch of land becomes available.
Make sure that you have a funding agreement for the entire build in place before you begin. It is very difficult to secure a self-build mortgage if the building work is already under way.
When you are budgeting you need to be realistic about the costs you'll face and allow for unforeseen circumstances that will inevitably arise. This could be down to extra structural or building work that you hadn't considered or it could just be that prices for materials and services go up over the length of the project. The experts advise adding eight to ten per cent on top of what you think your overall costs will be.
There are special insurers available that will provide cover for the various problems you could encounter along the way. This could be the difference between a setback that puts you a step back and one that stops the project dead in its tracks. Separately, you'll also need to pay for warranty on the house if you plan on selling it. Banks won't offer mortgages on any house which doesn't have ten years' worth of accredited warranty. Both of these will have to be factored into your overall budget, as will any legal fees related to deeds of purchase or registering the property.
As with most financial products, getting a self build mortgage and the rate you pay is dependent on your credit rating.
Click here to view the latest mortgage rates from the UK's leading lenders.
Author: KYM Editor
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