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This week&#39s problem case

James, 39, and Sarah, 36, have salaries of £20,000 and £50,000 respectively. They have found a plot of land for £150,000 on which they would like to build a new house. They have approached their lender on what to do next. The problem is they need 95% LTV upfront and as much capital as possible at each stage of construction to finance the scheme. They are unable to move out of their current property until the new house is completed.

Intermediary response

Ray Boulger, senior technical manager at Charcol, says James and Sarah will have to remortgage or take a further advance on their existing property James and Sarah require a self-build mortgage. The lender will decide how much to lend based on the cost of buying the land plus the estimated cost of the building work, and will require a valuer to provide a projected value. The lender will make an initial advance based on the land value followed by subsequent advances at various stages of the building process.

Any prospective self-builder needs to be prepared either to spend a considerable amount of time project managing the build process or to employ a specialist project manager. Employing a service such as BuildStore will be money well spent for the couple. BuildStore offers a choice of mortgages funded by several lenders – including Skipton and Britannia – and for up to 95% LTV at every stage, including the cost of the land.

Usually, before the lender will make a stage payment advance, it requires the valuer to reinspect the property. BuildStore&#39s accelerator mortgage, available through the lenders mentioned above, not only allows purchasers to borrow up to 95% of the land costs, build costs and end value of the home, but also includes a valuation guarantee scheme which enables purchasers to borrow the amount they need for each stage of the work without the requirement of a mortgage valuation first.

However, based on their salaries, the most James and Sarah will be able to borrow is £200,000, subject to them not having significant commitments beyond their existing mortgage. As they are paying £150,000 for the land alone this only leaves them £50,000 with which to build their home. They will have to find some extra cash from somewhere. The most obvious place would be their existing property, assuming they have enough equity in it.

James and Sarah will need to remortgage or take a further advance on their existing home. The advantage of this would be that they could reduce the LTV on the self-build mortgage from 95% which would give them more choice of lenders and products. The Ecology and Norwich & Peterborough could then also be considered.

Lender response

Colin Dale, head of lending at Skipton, says his society could provide a product that would allow the couple to live in their present property until the project is completed Traditionally, self-build has been associated with physically building your own home whilst having to sell your present house to fund the work and live in a caravan onsite. However, over the past three years the self-build market has grown as more would-be builders have seized the chance to exploit flexible lending opportunities and the favourable economic climate to obtain their dream home. The result is a home worth much more than it cost and, in many cases, in an area that would previously have been unaffordable. This market has become highly sophisticated with many lenders providing flexible lending criteria and products but there is a downside in that land is expensive and restrictive planning processes can put people off.

James and Sarah&#39s equity is tied up in their existing property so cashflow during the build is a major issue which means they need to borrow as much as they can to finance the project until their present house is sold.

A major issue will be project management as expertise is needed to juggle the requirements of all the parties that will be involved, i.e. lenders, planners, architects, builders, suppliers, insurers etc.

More options would be open to the couple if they could compromise on their preferred plan by selling their existing home first, finding temporary accommodation and unlocking their equity. By freeing up their working capital, finance would be available to buy the land and get the building started, and costs could be kept down.

If this is not feasible the mortgage options open to James and Sarah will be narrowed so they should shop around to see what suits their needs. There are specialists in the market who operate self-build mortgages, providing help through the release of higher loans to value at each stage. However, product choice is usually restricted. And to save having to renegotiate the loan at a later date when costs escalate it is vital to have additional cash reserves in place. This will also help if emergencies arise.

A recommended option for James and Sarah would be to use a specialist company to manage the project. For example, BuildStore, a company based in Scotland, can help self-builders achieve what they want. Through its expertise and connections with land agents, planners, architects, solicitors, building suppliers, specialists, insurers and mortgage lenders, BuildStore is able to manage the whole project from plot search to completion.

Included in the service is finance as BuildStore has a panel of lenders with products specifically designed for the self-builder. Skipton is a member of this panel and by selecting one of our products James and Sarah could receive 95% of the land value and have 95% of the costs released at each stage in advance of the work being done. This would allow them to live in their home until the project is completed.

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