One of the many challenges facing self or custom builders is trying to work out the best type of finance for their project. (In case you’re new to all this, self build is when you manage the whole project yourself and with custom build you bring in professional support to look after the day-to-day logistics, leaving you to make all the fun creative decisions.) Self build mortgages release funds in stages – in arrears or in advance. Depending on your individual circumstances, your stage payments will either be guaranteed based on your project costs, or rely on an uplift in value at each stage.
Custom build mortgages are similar to self build mortgages in that they release funds in stages, as the build progresses. Your stage payments will be tailored to your individual project.
Self build mortgages
As you might expect, it’s more complicated arranging self build mortgages than one for an existing residential property. The lender will have more questions to ask and will be just as interested in the professionals you intend to use as they will be in your own circumstances. The questions will include everything from a breakdown of your building plans, time scales for the project and the expected end value.
It might sound like you’re going to have to jump through a lot of hoops, but the more information you can provide the lender, the easier it will be for them to recommend the mortgage option that’s most suitable for you.
Your questions answered
You’re also likely to have some questions and we can try to answer some of those for you.
How long will it take to arrange a mortgage? Depending on your experience, the thoroughness of your preparation and whether planning permission has already been granted, this can take anything from four weeks to several months.
How much can you borrow? As with everything, this will vary from project to project, but you can expect to be able to borrow up to 80% of the price to purchase the plot and up to 100% of the building costs. (If you own the land outright, then you can expect up to 85% of the build costs to be offered.) The total amount you will be able to borrow is likely to be no more than 80% of the project’s estimated end value.
Will I get all the money at once? Build costs are always arranged in arrears, so after each stage is completed the funds will be released. To help with your cash flow, funds against the land value may be released to go towards your build costs.
What sort of fees can you expect to pay on your mortgage? There are plenty of these to consider, unfortunately. First, there’s a set-up fee which might be as much as 1% of the total amount you intend to borrow. There is also likely to be an Exist Fee which could be another 1% of your loan amount or your project’s end value. There will also be all your professional costs such as the solicitor, the architect and the project manager, which can usually be added to the value of your loan.
How long will your mortgage last? This is typically short-term finance to help with property development, and the loan term will usually be between 12 - 18 months. The key to successful development is speed. The quicker you can turn things round, the shorter time you’ll need the borrow money and the greater your profits are likely to be.
Custom build support
This article has really only scratched the surface, and there are so many other things you’ll need to consider when setting about arranging your mortgage, not least the interest rate. The advantage of choosing the custom build route over self build is that you will have an experienced professional alongside you to guide you through this finance maze as well as all the other stages of your construction. To find out more about this particular option, learn more about what we do.
