Dear Dippy: Solicitor Mr Reznor earns £44,000 plus a potential bonus in his new job. His wife is expecting their third child so they have outgrown their house valued at £150,000. Their mortgage is £75,000 and they have savings of £30,000. They found a plot of land costing £100,000 and want to build a house while staying in their present home. They estimate building costs of £90,000. What are their options?
Dippy says: New builds seem to be rising in popularity, with more lenders entering this market. Giving their expert advice are Ramona Leavers from All Types of Mortgages and Mark Underhill from Accord.
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Ramona Leavers is marketing and public relations executive at All Types of Mortgages
There are a number of factors to be considered in a case like this. First and foremost we must ascertain how long Mr Reznor has been in his position with his new firm and whether he is required to work a probationary period as this could affect the Reznors' ability to find a lender willing to look at this scenario. However, if Mr Reznor is able to prove that he has been in continuous employment in the same field and that he is not expected to work a probationary period the case would be fairly easy to place.
As Mrs Reznor is expecting their third child and as it is not clear whether she is working or not we will assume that we have to work with Mr Reznor's sole income of £44,000. Using a conservative income multiple of 3.25 x income and assuming that the Reznors do not have any other outstanding commitments Mr Reznor should be able to raise a maximum of £143,000.
Although Mr Reznor's income enables him to borrow £143,000, he and his wife will not be requiring this level of borrowing. If their existing house is valued at £150,000, once they have paid off their existing mortgage they will be left equity of approximately £70,000 after costs. This, coupled with the £30,000 they already have saved, gives them a total of £100,000 to put down on the new build. If the figures they are working to are accurate, the Reznors will only need to borrow £90,000.
The Reznors, however, have expressed a desire to stay in their existing home until the build is complete. Because of this another option available to them is to remortgage their existing home as a buy-to-let and raise capital on that basis. By taking this route the maximum they could borrow would be 85% of the property value (£127,500) subject to any rental income they receive. Once they have cleared the outstanding mortgage this amount in addition to the money they have saved would give them £82,500 toward the new build. So they would need a mortgage to finance £107,500 worth of borrowing.
The Mortgage Business would be able to assist the Reznors with both the buy-to-let remortgage and the build. With the self-build TMB would release 50% of the land upfront and the remaining money in four stages as the following processes had been completed: footings, wall plate levels, internal plastering and final completion. All TMB's normal rates would apply.
Mark Underhill is commercial director at Accord Mortgages
The main things to take into account with Mr Renzor's case are the property finance arrangements and the affordability of the project.
Based on Mr Reznor's income of £44,000 plus a potential bonus I calculate total borrowing capacity to be in the region of £175,000.
However, this is only a rough estimate and I would like to point out that it could turn out to be more depending on the details of his bonus.
Also, it's worth pointing out that in this instance, if Mrs Reznor is on maternity leave from her employment, Accord will also be able to take into account her salary prior to her maternity leave starting.
With the kind of project Mr Reznor is considering embarking upon there are two main options that he could consider for raising the finance he requires to take it to completion.
One route available to the Reznors is to release equity from their existing property or take on an installment advance mortgage. In this instance, releasing equity (by way of remortgaging or taking on an additional loan from the existing lender) will not provide the finance required – a 95% LTV mortgage on the existing home would only provide additional finance of £67,500 compared with a total build cost of £90,000 – and many self-build projects go over budget.
Accord Mortgages also has an instalment mortgage in its range. This type of mortgage deal provides a staged release of funds during the self-build project. Unfortunately, this would not be suitable in this instance as Mr Reznor's income would not be sufficient to cover payments on the existing mortgage as well as the new one.
Another possibility would be for the Reznors to consider selling their existing property and moving into rented accommodation during the building of their new home.
This has the advantage of releasing equity from the existing property but practicality has to be brought into the equation as the rental payments would also have to be considered alongside the mortgage payments on the self-build deal.
One option that many hardy self-builders consider is living onsite in a caravan or similar during the build process. Obviously, this has the benefit of allowing onsite supervision of the work but again does not seem practical given the family's expectations.
This case is probably best referred to an organisation such as BuildStore which specialises in self-build, both via intermediaries and direct.