Self-Build Mortgages

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, Self-Build Mortgages, Montgomery Financial

Self-Build Mortgages

Charles explains self-build mortgages – how they work and when they are a good option. 

Is it hard to get a self-build mortgage?

Like every mortgage it depends on your income, deposit and your credit record. It’s a little bit more complicated and can be longer winded. But as long as you’ve got a deposit, good credit and the income to support the mortgage, it should be absolutely fine. 

There are a few things you need to do pre-submission, but with a good mortgage adviser holding your hand, it’s a breeze.

Are self-build mortgages more expensive?

Because there’s a limited pool of lenders who are willing to offer self-build mortgages and there being a higher level of risk, these mortgages do have slightly higher rates. They are slightly more expensive than your standard lending. 

A lot of people use a self-build mortgage to complete the build stage and then move over to a high street lender to get more competitive rates. It’s slightly more expensive, but not astronomical.

Do you need planning permission for a self-build mortgage?

Yes. This is the key thing before embarking on any of this. Without planning permission, lenders won’t look at it. You won’t get a Decision in Principle. 

They want to know what can be built there and how much it’s going to cost before making any decisions. It’s an absolute essential before you even start speaking to lenders.

Do many lenders offer self-build mortgages?

No. It’s quite a shallow pool of lenders because it’s not an everyday product. The average high street lender isn’t going to provide it. It’s very specialist. 

A few lenders and building societies are brilliant in this area, and at the upper end some private banks are really good at it. But you wouldn’t go into your standard Nationwide branch and ask for a self-build mortgage. It is much more bespoke.

Is the application process different to other mortgages?

The actual application process is pretty much the same. The main differences are at the start and the end. With the application, the bank is making sure that you have planning permission, a cost schedule and a building schedule. They’ll be assessing all this along with affordability to give you a Decision in Principle.

Then, once you’ve got the mortgage agreed, the lender releases payments in stages. As you reach a certain build stage they release a certain amount of money. You know exactly how much they’re going to give you at each point, and also what you need to achieve to get the next tranche of money. 

There might be two or three points where you get things done and then they release the next amount of money to you.

How much of a deposit does someone need for a self-build mortgage? Is it possible to use land as a deposit?

They’ll normally want a 25% deposit, although you might be able to get away with 20%. You can use a piece of land towards your deposit. 

So if you’ve got a bit of land that’s worth £100,000, you might be able to borrow £75,000 on that. Then perhaps your planned build will be worth £200,000 – the bank would lend you another £150,000. – check this for transcription  accuracy

Or, you can opt for a bank to lend you the money and with a standard 25% deposit. They would lend towards the cost of the purchased land and build costs. So you don’t need the land, but often it can speed things up, as it makes less things uncertain.

Do you need to own the land for a self-build mortgage?

No, you are able to get funding from a lender to buy the land and build the property. Being honest, it is a lot easier if you already own the land, but if not you can get the lender to fund it all. 

The land you’re buying would need to have planning permission for a lender to consider it. But you might own a house already that has a very big garden. You might be able to split the title into two and build a house on half the land using a self-build mortgage. You could then sell it, or remortgage it and turn it into a Buy to Let. I have a client who’s doing that at the moment.

Can you get a mortgage on a half-built property?

As long as it is ‘habitable’ by a lender’s standards – it needs a functioning kitchen and bathroom. Even if they are not modern or the nicest to use, as long as they are there and functioning you can get a mortgage. 

You’re then potentially able to raise funds to do renovations. The property also needs to be weather tight, so it needs a roof and windows. 

What credit score does someone need to buy land?

It’s very similar to the standard rules on a mortgage. If you’ve had a few blips and issues in the past, It’s not the end of the world and you still can get a self-build or standard mortgage. 

Your credit does ideally need to be on the cleaner side, at a score of 600 plus based on Equifax, for example. If you’ve had major issues in the last two years you might struggle, but if you’ve had two good years since any issues you should be okay, especially if we’re going down the building society route.

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We want to keep that relationship with you up until your mortgage completes in 20, 25 or maybe 35 years. It’s not just a one-off transaction. It’s a long-term relationship, where we watch the market to get you the most positive products out there and try to save you money.

How are self-build mortgages calculated?

They are broadly based on borrowing at a 75% Loan to Value. Very similar to your standard mortgage, it’s based on your personal affordability. Lenders look at what your income is and the payments you’re able to sustain. 

So if you’re earning £12,000 a year, a bank won’t lend you £400,000 for a self-build mortgage. They need to be assured that even when the build is complete they are able to get their money back and you will be able to keep up the payments. 

Different things would also be taken into account, such as demand in the area and the estimated costs provided by builders and quantity surveyors. You might request £300,000 but then the surveyor costs come back and suggest it’s going to cost £400,000. The lender would then ask lots of questions about how you will make up the shortfall. 

If your figures are too optimistic, they’ll ideally want you to have some leeway in your affordability, in case something unexpected comes up. In the last year, for example, we’ve seen the costs of building materials go up 10% to 20% – that can put a massive hole in your budget. 

They also look at whether there could be any issues further down the line. Are you going to have any financial challenges in 12-18 months time that would cause issues with your affordability? So they look at sustainability as well as cost.

 

Will a bank finance a fixer-upper? Can you get a mortgage to renovate a property?

Yes, you can get a mortgage to renovate a fixer-upper. Again, it comes down to it being water and wind-tight and habitable. It needs doors, windows and a roof. It needs a kitchen and a bathroom. 

They will then provide finance as long as you meet their credit scoring and affordability. Let’s say you’re looking at doing an extension on the side of the house or putting a conservatory on. You’d be able to go to a high street bank for that – you wouldn’t need a self-build product. 

But if your intention is to knock down the house and build something brand new, we wouldn’t be able to use a high street lender. We’d have to go down the specialist self-build route. But at that stage you’d own land, and you can use that towards your deposit.

How can a mortgage broker help? Is there anything else you’d like to add on self-build mortgages?

Self-build mortgages are not simple and ‘vanilla’. They’re complicated. It’s an area where clients need a lot of handholding and guiding through the journey. It’s not as simple as getting a mortgage offer, a solicitor to deal with the money and moving in. You’re having to liaise with builders and wait until the money is drawn down in certain stages. 

Brokers do this stuff all the time, and it’s imperative to use their knowledge and understanding of how it’s all done to make it as simple as possible. Making a mistake with self-build becomes very expensive and very stressful, because you’re not just buying a house, you’re also managing a very big project. It’s a very specialist area and we have a lot of experience in dealing with these lenders.

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

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