How to Fund Your Dream Self-build Home
There are some major advantages to building your own home; you have complete control over what you get (within the building regulations and planning approval). The size, quality, configuration are all completely down to you!
Another significant benefit is the savings that are possible if the project is well managed. There is no stamp duty to pay, except on the purchase of the land you build on. You can reclaim the VAT on all the building materials (find out how here and download our VAT reclaim template for free). By taking on elements of the project, such as managing it yourself, you are not paying a developer to do this or paying for their profits. This often means you can get much more house for the money when you build it yourself.
What to Finance When Building a Selfbuild Home
There are some key cost elements that need to be paid for when you are building a self build home. These are:
- Land: The cost of the land (including legal fees and stamp duty, etc)
- Design: The design costs associated with getting your home designed, but also through building regulations and achieving the required certification on completion
- Infrastructure: Costs, such as getting the services (utilities) to your home but there might be a requirement to dropped kerbs, street lighting changes and many more
- Build: The cost of the build, including all garden works, decoration, fencing and access
- Finance: Unless you fund the project completely yourself, there will be a cost to the money that you borrow to pay for the project. It includes interest and any fees
Now you know what you are paying for, you can then prepare a detailed budget so that you know exactly how much you need. Then add a percentage for contingency and unforeseen issues. This is the amount of money that you need to raise.
Borrowing Money to Fund You Self Build
Unless you are very fortunate, you will probably have to borrow to fund your dream home project. If you can avoid having to borrow, this is always going to be the cheapest route. Sadly for most of us we will have to borrow something to get the project completed. Find out about the different types of self build mortgage options here.
The principles of a self build mortgage are exactly the same as a normal repayment mortgage for a completed home. You are borrowing money that is secured against your home, which means that if you cannot make the repayments the lender is entitled to repose the property.
The difference with a self build mortgage is that your home is not completed when you take it out, so as you progress towards completion, and the value of the property increases, the lender can release more money to you to fund your project. The stage payments cone at pre-agreed milestones during the project. We cover this in much more detail in our selfbuild mortgage project.
Like a traditional mortgage on a traditional home, the amount you can borrow depends on 2 main things.
Firstly in exactly the same way as a traditional mortgage a Loan to Value rate (LTV) is used to determine how much the lender is comfortable lending you. Typically, for a selfbuild, you will need 25% of the value of the completed property yourself and the lender will provide the other 75% (known as a 75% LTV).
Obviously you will only get this in stages at the home gets closer to completion and its final value. The difference with a selfbuild mortgage and a mortgage for a traditional property is that the LTV for a traditional mortgage lender will tend to be higher (ie, you can borrow more against the value of the property) for two reasons; there are many more traditional mortgages, borrowers and lenders so competition is much greater meaning that the offers are better, but also a self build mortgage carries more risk as if you default before the property is completed the lender will have to complete it and then sell it to recover their money.
The second factor that determines how much you can borrow is the affordability measure. This is exactly the same as for traditional mortgages. If you cannot afford to borrow the amount you need the lender will simply not give it to you.
We have already touched on the extra risk that the lender will have when lending to exactly the same person who is borrowing against a self build rather than a completed home. This extra risk translated into a higher rate of interest, making it more expensive to borrow against a selfbuild.
There are a couple of things you should consider based on what you know about how a self-build mortgage works:
- Avoid them if you can – it will be cheaper to borrow against your current home, or sell your current home to fund the build, if this is possible
- On completion you will achieve a better rate if you convert the self build mortgage to a traditional mortgage. Check what you are allowed to do before you sign up to your mortgage
This is a summary of how self build mortgages work and how they compare or differ to a tradition mortgage that we are all familiar with. For more information about the specific of how self build mortgages work see our project about them.
If you are interested about your own self-build project you might consider buying Andy Patmore’s book Build Your Own House.