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Self-build mortgages on the rise

Sizing the self-build market has proved difficult. Research company Datamonitor estimates that the number of self-builders grew from about 14,000 in 1998 to 17,000 in 2002. Anecdotal evidence suggests that the number was near 20,000 by the end of 2006.

As a result of this growth, the availability of self-build mortgages is rising. Build It magazine suggests that 65% of self-builders will take out a mortgage to finance their project while the remainder will use short-term cash or savings.

Self-build mortgages need to be tailored because the money is released in stages rather than as a single amount. The stages for release depend on the construction type and whether it is a new building or a renovation.

Although the number of stages varies from lender to lender, typically the key ones are – purchase of land, preliminary costs and foundations, all plate level for brick properties or timber frame erected for wooden properties, making wind and watertight, first fix and plastering and second fixed completion.

There are two methods by which funds can be released during construction – in arrears or in advance. Under the former, money for a particular stage is released after it has been completed and an interim valuation has been carried out. The disadvantage of this is that some individuals might be faced with cash flow difficulties.

The advance payment method was developed in 1998 and has since grown in popularity. Money for each build stage is released before construction for that stage starts. This creates positive cash flow right from the start. Many believe that this method has triggered growth.

BuildStore, a supplier to the self-build market, says about one-third of self-builders don’t need a mortgage after their build’s completion but still need cash for the property.

However, a lot of these people do not have immediate access to capital unless they sell their existing property before starting work. Short-term bridging can help here.

There are more than 40 lenders offering mortgage products for self-build projects. Several others offer bridging loans on an individual basis.

While self-build is still a niche market, it will grow in popularity, especially when the benefits of building homes for profit or residence outweigh financing and construction constraints.

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