GETTING A MORTGAGE TO BUILD YOUR OWN HOME
Self-building offers multiple advantages, including the opportunity to follow your own vision and get the right house in the right location. It can be a cost-efficient solution, with the average self-builder spending £270,000 on their build. (1) An adviser can help you navigate the self-build mortgage market and put you in touch with a company that will manage the entire project for you.
It was no surprise that DIY stores enjoyed a sales boom during the various lockdowns, as homeowners distracted themselves with improvement projects. Now, as the latest restrictions are eased, your thoughts may be turning to a more ambitious DIY project – building your own house from scratch.
Building your own home might sound like an unrealistic dream. But these days it’s easier to self-build than you might expect, according to Paul Johnson, Chartered Financial Planner and Head of Mortgages at St. James's Place Wealth Management.
“About 20 years ago, it was hard. But today there are so many companies that can help you with it,” he says. “There’s a misconception it’s difficult to get finance, but there are at least 20 lenders out there that will lend on self-build.”
Degrees of DIY
The attractions of self-building are various. Perhaps the most obvious is the level of choice and control it offers, with the opportunity to follow your own vision and not be constrained by what’s currently on the market. As Johnson points out, people who have lived in several homes and are looking at their next move often have particular preferences and requirements.
“There’s always something that’s not right. Maybe the houses they’re looking at aren’t in the right location. Or they’re in the wrong style. So, they want to work from a clean sheet – where they choose the area and build the property to their own specification,” he says.
There’s also growing demand for eco-friendly self-builds from those wanting to ensure their home is as energy-efficient as possible. There’s a potential cost advantage here, with a growing number of lenders offering green mortgages that have lower interest charges on more energy-efficient properties.
In some areas it’s becoming easier to secure planning permission, too, with local authorities increasingly flexible and accommodating when it comes to converting vacant ex-commercial space, says Johnson.
While some people want to take on a self-build project as their own and manage the process from start to finish, others would prefer to remain relatively hands-off. It’s up to you how involved you want to be, says Johnson.
“We can introduce you to someone who can take the stress of the project off you – from the building process to the finance. Or, if you prefer to get stuck in, we can simply advise you on the lending and help prevent you from running out of money before the end of the process.”
Whichever approach you take, it’s vital to seek advice from the outset. “Don’t just dive into it. Step one is to talk to an adviser before you start looking at land, getting a builder and putting plans in place,” says Johnson.
It’s especially important to understand what it’ll cost, whether you can afford it and the type of lending you’ll need in place.
Making it add up
The self-build approach can be cost-efficient and potentially cheaper than buying a new property. Research suggests the average self-builder spends around £270,000 on completing their project, with the cost of the plot averaging out at £190,000. (1)
But at the outset, it can be easy to underestimate the various costs, while navigating the self-build mortgage market is much easier with expert advice.
High-street banks generally avoid lending on self-builds, so the best bet is usually one of several building societies, with the likes of Skipton, Leeds, Ecology and Furness among the specialists in the area.
There are crucial mortgage differences to be aware of, too. While traditional mortgages provide the finance in one go, self-build loans are usually released in tranches.
“They release the money as you go through, but every lender is different in how they do it,” says Johnson. “They typically start providing funding for the land, but not all of them will.”
This is designed largely to protect lenders and reduce the risk of funds running out during construction. But it’s an arrangement that can become complex for borrowers when phases are delayed or costs begin to rise.
The application process is largely similar to that for standard mortgages, however. Lenders will want to see the planning permission – but aside from that, the focus is mainly on affordability and income.
So, it’s far from an impossible dream, says Johnson – provided you get good advice. “Talk to an adviser. You might be surprised at what you can do, and it’s often a very logical step. Why look at second best or compromise when you’ve got your own vision and you know what you want?”
Your home may be repossessed if you do not keep up repayments on your mortgage.
(1)Homebuilding & Renovating, Self & Custom Build Market Report, 2020