Ian and Claire require a self-build mortgage, which is a product designed primarily for people who are building a property from scratch. The lender will base its decision as to how much to lend on the cost of buying the land plus the estimated cost of the building work, but will also require the valuer to provide a projected 'when finished' value, all subject to the applicant(s) having an adequate income. 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 to either spend a considerable amount of time project managing the build process, probably making mistakes and learning as they go, or else employ a specialist project manager. Using a project management service such as Buildstore will often be money well spent for the novice self-builder. Buildstore offers a self-build package that covers everything from finding the plot to organising builders, buying the materials and organising the finance. It offers mortgages funded by Mortgage Express, Skipton Building Society and Britannia and the mortgage package offers up to 95% LTV at every stage, including the cost of the land.
The normal situation with a self-build mortgage is that, before the lender will make a stage payment advance, it requires the valuer to re-inspect the property every time further funds are required, in order to put a current value on it. Any delay in this process and a consequent delay in the release of funds to pay the builder or tradesmen, or for materials, may delay the building work. Of the other self-build providers the one that stands out, particularly for borrowers with a high LTV requirement, is Norwich & Peterborough Building Society. N&P offer a choice of any of its mortgage products and will typically lend 85% of the land value and then 100% of the building costs as long as the combined amounts do not exceed 95% of the completed property value.
Based on their salaries the most Ian and Claire will be able to borrow would be approximately £200,000, subject to them not having any other significant commitments apart from their existing mortgage. However, as they are paying £150,000 for the land alone I assume they will want to spend rather more than £50,000 on building their new home. Therefore in order to achieve their objective they will have to find some cash from elsewhere. The most obvious, and possibly the only, place would be their existing property, assuming they have enough equity in it.
Ian and Claire would need to proceed on a two-stage process – firstly remortgaging or taking a further advance on their existing property to inject some cash into their self-build project. One advantage of this is that by having the extra cash they could reduce the loan-to-value on the self-build mortgage from 95% and this would give them more choice of lenders and hence mortgage products. However, using lenders like those already mentioned, who are experienced in the self-build market, may well still be most appropriate.