Self-build – Finance your Dream Home

Having your very own, custom-built dream home is a lot easier and

cheaper than you might think. Although building your own property

involves a great deal of planning and hard work, it’s within the reach

of most people, especially now that many mortgage lenders will lend on

self-build properties.

It’s generally much cheaper to build your own house than it is to buy

one pre-built. The average cost of a self-build home is approximately £150,000.

The return on investment can be much greater too – as soon as it’s built

you can expect an increase in value of 25-30% on what you paid to built it.

One of the major hurdles to overcome when considering a self-build

project is obtaining the necessary finance. Some people opt to release

equity from their existing mortgage, although this may not raise enough

to fund the entire project – it depends on the value of the property

against the current mortgage on it.

If this isn’t a feasible option, another possibility is to take out a

second mortgage. Many lenders offer specially tailored self-build

mortgage products. If you go down this route, you’ll need to decide

what to do with your existing property. Work out whether you can afford

to have two mortgages on the go during the build, to enable you to live

in your current house until the new one is ready – or indeed whether

there are any mortgage providers prepared to lend you a second

mortgage. This can be a convenient way to finance the project, as it

means you only have one house move, and mortgage repayments are often

cheaper than renting.

If you can’t afford two mortgages, the other options are to sell your

current house and move into rented accommodation, stay with family or

friends or even buy a mobile home or caravan to live on the building

site. The latter may not be a suitable arrangement if you have a young

family.

Self-build mortgages tend to have similar terms and conditions to conventional mortgages.

You could have either repayment or interest only, and the interest

rates available (fixed, capped, variable, etc) tend to be the same. The

two main differences between self-build mortgages and conventional

mortgages are that the maximum loan-to-value that will be provided is

normally no more than 75% for self-build, as opposed to up to 95% or

even 100% for a conventional domestic mortgage, and the funds are

released in stages instead of all at once.

The way in which the funds are released depends on the provider. It’s

normally at key stages of the construction for example the laying of

the foundations, when the building is wind and watertight, when the

roof is complete, but some lenders release the funds upon completion of

the stage, and others in advance. The issue with the former, arrears

stage payments, is that the money is not available to fund the

construction in advance, so it can cause cash flow problems. Some

lenders offer advance stage payments, though, which makes it much

easier to keep the cash flowing as the project progresses. Whichever

way the lender operates, they will almost certainly want to send a

surveyor or valuer to check on the progress of the build before they

release each payment.

Sometimes up to a third of the cost of a self-build property is the

purchase of the land. There isn’t much spare land in the UK so prices

are at a premium, particularly in popular built-up areas. Some lenders

will be prepared to lend for land purchase, others won’t, or will

provide it as a separate loan, so be sure to check this out when doing

your research.

Most lenders will want to see the architect’s drawings and planning

permission before agreeing to lend you any money, as well as a schedule

of works – some lenders will put a time limit on the build, often one

year.

As well as being a cheaper way to buy a house, self-build has other financial advantages.

The cost of building a new home is zero-rated for VAT purposes. You also

won’t be subject to capital gains tax on the capital you make from

selling the property, and there’s tax relief for financing the new

build while remaining in the existing home. Many self-build projects

are also exempt from stamp duty as this applies only to the purchase of

the land – unless the land price is over £60,000.

If you’re able to arrange funding to build your own home and are

confident that you have the management skills to keep on top of the

building work as it progresses, then self-build could be the ideal way

for you to get the home of your dreams without it costing an arm and a

leg.