Whether you are buying a home, renovating a home or building a home you have come to the right place. Home Loan approval Perth is your guide to finance and housing and we are located in Perth. With plenty of helpful articles and tips, we hope to provide you with the information you need to make your next big housing decision.Read more
Building your own home can create a more valuable and energy efficient house and is often cheaper than buying a residential property.
Yet, while self-build is glamourised in many property programmes and articles, the process of financing a project can be rigorous.
Unless you have a load of spare money lying around, you will need a mortgage to fund your self-build. Specialist Buildstore has provided some top tips on how to get a self-build mortgage below.
Find an expert
Self-build is a niche market for lenders and many have exited in recent years citing a lack of demand. This is an area where it is definitely worth talking to your local building society.
Deals are available from lenders such as Norwich & Peterborough, Saffron Building Society, BM Solutions, Leeds Building Society, or specialist Buildstore.
Deposits, rates and terms vary depending on planning permissions and the stage of the building.
There are additional items you will need such as your planning permission and plans of the house so the lender can do an end value.
When applying for a self-build mortgage, your current mortgage or rent commitments will be taken into account by a lender when deciding how much you can borrow for your project. The way affordability is assessed depends on the lender.
Make a budget
Rachel Pyne, head of Buildstore’s financial services division, says: ‘Getting a standard mortgage is complex enough.
‘When you add self-build to the mix you are not just matching the mortgage to your financial position but to your whole project.
‘It is important to do your research and consult specialist.’
The bank will want to know how much you estimate the project will cost. You will also need to be able to ensure you can afford somewhere to live in the meantime.
According to Buildstore, the amount you can borrow to purchase the land will be 75 per cent of its current value, and for the build costs, again 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 value of this, meaning you can borrow more of the build costs.
You may need to access savings to fund the build so you should make sure they are not locked up. Also, if you area selling your house you will have to check your mortgage is free of early repayment charges.
Make a detailed plan
A lender will want to see detailed plans for the property, a projection of costs and planning permission details.
The whole application process can take five months on average.
You will have to be clear on everything including the people and materials being used. Factors such as build type, construction method, materials, location, and schedule of costs will all impact which lenders will lend and how much.
Consider how you will receive payments
Lenders typically release the money for a self-build in five to seven stages, taking a project from foundations to the finished property. They may want to inspect each stage before signing off on the next slice of money.
This protects a lender from throwing good money after bad if a project goes wrong. The inspections and extra administration make self-build loans more expensive than a conventional mortgage.
Funds are released in stages during the works on an arrears basis. A traditional self-build mortgage pays the fund for each build stage at the end of that stage, once competed. This is not ideal if you don’t have cash to fund you through each stage.
Alternatively, with an advance mortgage you get the money before each stage and once each is complete and signed off by a valuer, that triggers the release of funds for the next stage.
Some banks don’t lend until the property is watertight, while others may be happy just want to see the foundations built.
There may also be terms about doing all the work yourself or using a contractor.
People are more commonly aware of using bricks and blocks or timber frames to build but there are other forms such as structurally insulated panel. Lenders may only provide money against using certain materials.
The lender will do a valuation at the beginning of the process to give the estimated end value, and will do a valuation at various stages.
Some lenders will give money on an interest only basis, this will help you budget for costs better.
The average application time is five months.
Change your rate once the project is complete
The initial mortgage rate during the build is often high, between 5 and 6 per cent, but you may be able to switch to a lower rate once the property is built and the lender has done a valuation. You may also be flipped onto a repayment mortgage as well.
According to Buildstore, the average end loan-to-value on self builds is 58 per cent. The average cost-to-value is 72 per cent.
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