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5 tips for Self-Build Mortgage Borrowers

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5 Hints and Tips on Self-Build Mortgages

We all have a dream home in mind and some are lucky enough to realise that dream. In line with the rest of the mortgage market, self-builds have suffered over the last couple of years.    But self-building is not easy and certainly is not for the faint hearted.

This post will help you get a few steps closer to building the home of your dreams by guiding you through the self-build mortgage maze.

1. Budget, Budget, Budget

Despite improvements in market conditions it is still difficult to get a standard mortgage, a self-build mortgage brings added complexities. Not only is the lender underwriting your personal financial position but they’re also evaluating the feasibility of the self-build project.

The lender will want to know

  • What is the project estimated to cost?
  • Have you got contingency funds available should the self-build costs run over?
  • Do you own the land or do you need to purchase the land?
  • Where will you live in the meantime and can you afford it?

Your borrowing will be limited, up to a maximum 75 per cent of its current value, and for the build costs, again with some lenders you can borrow around 75 per cent of the end value. If you already own the land or the property, you can borrow against the current value of the plot provided it has planning permission.  This mean you can get funds to get the project started.

2. Plan to Succeed 

This might seem obvious but a lender will want to see:

  • Detailed plans for the property
  • A projection of costs
  • Planning permission details
  • Site Insurance

The self-build mortgage applications process anything up to 1-5 months from start to finish so you need to plan ahead.

Your self-build mortgage will depend on things like:

  • Build type i.e. timber frame, traditional or other
  • Construction method
  • Materials
  • Location
  • Schedule of costs

These will not only affect how much you can borrow but when you will receive each stage release.

During the term of the build most lenders will release the money on an interest only basis, which can be a big help with budgeting however it is essential you can afford the full capital repayments at the end of the build.

3. Timing is Everything

Self-Build Mortgages release the money for the build typically in 5-7 stages from start to finish. A Qualified Professional is required to inspect the quality of the work at each stage before the lender releases funds. This helps protect you and the lender from shoddy workmanship. This, of course, adds another cost to the build and needs to be factored into your plans

Most lenders release each stage in arrears i.e. you must have the work completed prior to release of the funds for each stage. This can cause many prospective self-builders problems as you must have enough cash to fund you through each stage.

Advance stage release mortgages where you get the money at the start of each stage are few and far between but speak to a self-build mortgage adviser to find out if there are any available to you.

It is imperative to know when the first stage release is for your project, every lender is different and it is essential you can get to this stage.  Typical first stages are:

  • Purchase or release of equity from the land
  • Foundation or floor level
  • Brickwork to wall plate level or roof level
  • Wind & watertight

As you can see there is a wide range and a misunderstanding could spell disaster for your build.

4. Review your Mortgage once you are complete

Self-build mortgage rates are typically variable rates between 5 and 6 per cent. When compared to current standard mortgage rates, this seems very high.  The higher interest rate is to account for the greater risk the lender is taking on during the build.

Once the build is complete you may be able to switch to a lower rate on a standard residential mortgage. Remember a self-build mortgage is limited to 75% loan-to-value and hopefully you will have added some equity during the build which could leave your end loan-to-value somewhere closer to 60%.  This should give you access to some of the best rates available on the market however tread carefully as you may be subject to early repayment charges.

5. Get Independent Mortgage Advice

Of course we would say this but here’s why:

  • Self-build mortgages are a niche market for lenders especially in Northern Ireland and as such it is worth speaking to a self-build mortgage professional.
  • Deposits, rates, affordability and terms vary from lender to lender and this needs to be matched to your stage, project and planning permission.

You need to make sure you and your project matches the lender you approach and an Independent Mortgage Adviser is best placed to help

Image courtesy of Martin Pettitt on Flickr

 YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

About Ciaran Scullion

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