Tools of the trade

There is increased interest in self-build mortgages so brokers must have knowledge about the sector at their fingertips, says Vicki Charles

The burgeoning number of TV programmes encouraging home owners to renovate and decorate their houses has fuelled interest in self-build mortgages. But what are self-build loans and how do they work?

As the name suggests, self-build loans assist with the building of clients’ houses, with finance often being available if clients want to stay in their own homes during the build.

There are times when a self-build mortgage can be used for an off-plan purchase but this tends only to be on the rare occasions when a contractor or builder offers land and the service to build a house with the finance provided by the purchaser.

A self-build mortgage can provide an initial loan to help buy a plot of land. This typically does not exceed 85% of the value or purchase price of the land at the outset. But it is possible to arrange up to 95% LTV to assist people who do not have more than 5% deposits when purchasing land.

Further releases of funds are made at pre-determined stages of construction. There can be up to seven stages, depending on the lender. Reinspections of the property have to take place at each stage by the lender’s valuer and the architect to ensure that works have been completed and to allow funds to be released in arrears.

Upfront self-build accelerator mortgages are available for clients without deposits, with funds drawn down in advance. This can result in clients obtaining mortgages of almost 100% LTV in some cases.

Clients will need to instruct and seek advice from architects, surveyors, builders or suitably qualified people and provide the lenders with the following information:

• Details of the building plot and price.

• Architect’s plans.

• Full costings.

• The builder’s name and confirmation that they are registered with either the National House Building Council, Custombuild, Newbuild or the supervising architect’s details.

• Outline planning permission and full planning permission prior to any release of funds.

• Building regulations approval.

Most lenders offer a maximum of 95% LTV for self-build mortgages. Lenders may also offer reduced LTVs based on the requested amount. Generally, they will offer a lower LTV for higher loan requests. A rough guide to self-build LTV is:

• Up to 200,000 = 95%

• 200,001 to 250,000 = 90%

• More than 250,000 = 85%

Some lenders also have a maximum of 500,000 for each self-build mortgage due to the risk involved. Initially, 85% LTV is typically advanced for the purchase of a plot although some lenders will go to 95% for people who do not have large deposits. Roughly 20% of the remaining advance is usually then re-leased at each build stage.

As for rates, self-build mortgages have evolved over the past few years and no longer have to be arranged on lenders’ standard variable rates. It is now possible to ask for special rate deals at application, with some lenders allowing clients to choose any of the rates they have on offer.

A valuation fee, if charged, is payable upfront and is based on the projected end value of the property. The required reinspection fees for each stage release tend to be between 50 and 75.

Some lenders offer free valuations which can save clients several hundred pounds, due to the fee being based on the final valuation. Cashback deals can also sometimes be provided, which can help in meeting the costs of stage reinspection fees.

So, the pros of self-build mortgages include:

• The ability for clients to fulfil their property dreams – they can build what they want, where they want it.

• The avoidance of VAT – self-build homes are exempt from VAT which means it can be claimed back on most goods and materials once a project is complete.

• The price – it can be cheaper to build a home and often results in a higher end value.

• Maximising value is possible by self-managing projects and using individual tradespeople.

The cons include:

• Upfront costs involved with surveyors and architects to inspect the plot.

• Costs for planning permission prior to the purchase – and this can take up to eight weeks.

• Solicitors’ costs to ensure there are no restrictions on developing the land, acc-ess and the connection of services.

• The possible need for a project manager to control and inspect a project.

•A warranty or structural guarantee is required by the lender to protect against structural defects.

•An agreement stating the terms of payment and when the work is to be completed is needed.

•A contingency plan is required, as projects can go over budget.

•A self-build policy is required to cover subsidence, fire, storm, vandalism and theft while a build takes place.

•Third party liability insurance is needed.

Timing is determined by the stages of a build. These vary between lenders but are usually based on plot advance, foundations, first floor joist level, wall plate level and completion. Most lenders require projects to be completed within 18 months. The higher deposit a client has, the fewer payment stages will be required as their funds may get them into the second or third stages without having to use borrowed funds unnecessarily.

A copy of the architect’s professional indemnity insurance is usually required by the lender and this has to be approved prior to the release of funds when the build is covered by an architect’s certification.

Third party liability insurance is recommended. If the home is being built by a builder, a contractor’s all-risk policy will need to be in place, again approved by the lender.

Brokers may wonder how it is possible to help clients with self-build projects while they continue living in their existing properties, but in reality this is straightforward.

Some lenders annualise existing monthly mortgage costs and take this off the amount clients can borrow, just like a loan or credit card commitment. This allows for a second residential mortgage but on a self-build basis.

Last year, I dealt with some clients who wanted to buy a plot of land that had outline planning permission prior to selling their main home.

Fortunately, they were in a position to raise the capital by a remortgage on their home to fund the purchase of the land, with their parents acting as guarantors.

They were then willing to sell their home, allowing me to pass them back to the introducing estate agent and live in a caravan while the sale proceeds paid for the first couple of stages of the build, prior to starting the second mortgage as a self-build.

It was important that I provided a decision in principle to the clients regarding both mortgages to assist with the two stages to allow them to make an informed decision. The clients provided me with all the documents for the self-build at the outset to assist with the answers in principle for the remortgage and the self-build.

Because of the timescales involved, both mortgages were drawn down over 12 months after the property was sold and the self-build is on its final lap following four stage releases.

Another recent case involved clients who wanted to buy a plot of land to build a home on prior to selling theirs, and required some funding for land purchase and build.

I managed to arrange a remortgage on their existing home of 390,000 with one lender against an income of 80,000, and a further self-build mortgage of 392,713 with a different lender prior to the sale of their existing home.

I provided the couple with a lender that would treat their first mortgage as a monthly annualised commitment of 21,021 rather than a residential mortgage, to obtain the second mortgage of 392,713.

This resulted in a mortgage exposure of 782,713 and allowed the clients to remain living in their existing home until sold, at which point the self-build would be habitable.

I also managed to find them a deal that provided free valuation, 200 cashback, a variable rate of 0.59% above base rate, no arrangement fee, a reinspection cost of 50 and no early repayment penalties.

This was a perfect solution for my clients as they were able to live in their home while the build took place and redeem a large proportion of the self-build mortgage with the proceeds, once their original home was sold.