How to nail a good deal

A specialised mortgage allows self-builders to borrow money in stages
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The Independent Online

There are fewer caravans on self-build sites nowadays, thanks to a new type of mortgage that means self-builders are no longer sentenced to sell their house and cram their family into a chilly, crowded caravan while they build their new home.

There are fewer caravans on self-build sites nowadays, thanks to a new type of mortgage that means self-builders are no longer sentenced to sell their house and cram their family into a chilly, crowded caravan while they build their new home.

The mortgage, which provides money up front at the start of every stage of construction, has revolutionised the market by doing away with the need to raise capital by selling existing properties or taking out expensive bridging loans.

The BuildStore accelerator mortgage, which was followed by a similar product from Riley Associates, brought self-building within reach of people who lack large lump sums to splash out on land purchase followed by building work.

John Hay, director of product development at BuildStore, said: "The old arrears mortgages lent 75 per cent of the value of the land and 75 per cent of the build cost paid in arrears until the property was finished, when they would lend up to 95 per cent of the value. With our product you can borrow up to 95 per cent of the cost of your building plot so even with a relatively small deposit you can ensure the project gets off the ground. You can also borrow up to 95 per cent of the cost of each stage of your build and this is not subject to any interim valuations.

"Our product helps people get better deals on material and labour because they become cash purchasers. Time is also saved because once each stage is certified as being completed satisfactorily, the money for the next stage is released within a few days."

The cash-in-advance mortgages expose lenders to greater risk. If the DIY-building goes wrong and the work isn't completed, the lender could end up out of pocket. So the deal is put together by the borrower buying an insurance policy, which typically costs about £500 to £600 for every £30,000 of additional cash flow in excess of the normal 75 per cent, which other lenders supply before completion. The insurance indemnifies the lender against a self-building disaster that might see the home left unfinished or so jerry-built that the stages are not passed by building inspectors. (Which would mean the finished product was refused a quality guarantee, making it impossible to sell.)

Even allowing for the cost of the insurance, for those who need to borrow the accelerator deal tends to work out cheaper than an arrears mortgage. Nearly every different type of mortgage can be obtained, ranging from self-certification, trackers, flexible and capped. However, people with a big enough cash sum to pay for the building stages themselves may find the arrears mortgages to be best value. Building societies used to eschew self-builders, but now arrears mortgages are available from more than 30 building societies, with others offering bridging loans.

Impecunious - or cautious - self-builders still prefer to sell their house to release cash and move to a caravan on site to keep costs to an absolute minimum.

Cash in advance mortgages helps the self-builder to choose a convenient moment to sell their existing home. They can remain there until the last minute, when the new self-built home is finished down to the last detail, but this means they will have to pay two full mortgages for the final months of construction - and must keep paying until they manage to sell their old house.

Jonathan and Tracey Davies, and their sons James, 10, and Benjamin, five, had always planned to self-build. They bought a mobile home, intending to live there for two years while they hunted for a site. They spent nine years in the mobile home in Wattstown, Porth, Mid Glamorgan.

Jonathan, 38, a printer, says: "We didn't realise it would be so hard to find a site. In the end by coincidence we found one next door when the site of an old church went on sale. By that time, I'd done quite a bit of homework by reading magazines and knew about different types of mortgages. We went for a cash in advance mortgage because it provided money up front at the start of each stage. We used a National House-Building Council (NHBC) solo warranty for each stage. Their local agent came out at 24 hours' notice to assess the work starting with the foundations and going onto what as I remember were six other stages. He gave us a certificate saying we had completed a stage and I posted it to the building society, and within seven to 10 days the money was transferred to our bank, ready for us to pay for the next stage.

He adds: "We took a repayment tracker mortgage, but at the earlier stages we only paid interest on the amount we had actually borrowed at that time, so our repayments started low and built up. Because the loan provided money in advance of the building stages, we didn't have to have so much cash saved. Without it we'd have had to take expensive loans or put off building for a few more years until we'd saved up more."

Running two mortgages for a time means that financial pressures tend to mount towards the end of construction. Most people put their existing home on sale a couple of months before their new home is ready, but no doubt some have to reduce their asking price in a bid to get a quick sale once time starts to run out.

The accelerator mortgage is based on the projected value of the new self-built home, but those who decide to remain in their current home have their maximum new loan reduced by six times their current monthly mortgage payment. Borrowers are given 24 months to complete the build. One advantage of staying in the existing home is that money is saved on furniture storage, renting a property or buying a caravan.

Lloyds TSB Scotland, Skipton Building Society, Amber Home Loans, Ecology Building Society and The Mortgage Business all lend on an accelerator. This type of mortgage can be used to buy land with outline planning permission, unlike some of the other self-build mortgages, which require detailed planning permission that can take months to arrange.

BuildStore ( www.buildstore.co.uk)

Riley Associates ( www.riley-associates.co.uk)

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