The means to do it yourself

Self-builds give you the home of your dreams, but funding isn't always that easy. Stephen Pritchard reports
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The Independent Online

Plenty of people dream about building from scratch, but only a small minority turn that dream into reality. Finding a plot, coming up with a design and picking the right builder are all significant challenges. But none of these steps are possible without securing the right financing.

Plenty of people dream about building from scratch, but only a small minority turn that dream into reality. Finding a plot, coming up with a design and picking the right builder are all significant challenges. But none of these steps are possible without securing the right financing.

A regular mortgage will be of little use to the self-builder, as banks and building societies require a habitable property as security for the loan. One option is to finance all or part of a self-build project in cash, possibly from the sale of an existing property. But the key to making a self-build project happen is to find a lender that is willing to advance more than the value of the land by itself, instead basing a mortgage on what the property will be worth on a "when finished" basis.

Usually, a bank or building society will lend up to 90 per cent of the land's value, then advance more funds at key stages of construction, such as completion of foundations or making the property weather-proof. At each stage, the advance will be less than the total cost, with the self-builder putting in some of their own funds. This approximates to the deposit a buyer would have to put down for a completed house. Payment will either be in arrears or less often, in advance.

According to John Hay, head of product development at Buildstore, a resource for self-builders, payment in arrears can put too much pressure on finances. Advance payment mortgages - a more recent development - are a great help with cash flow.

If the self-builder has done their sums carefully, however, the open-market value of the finished property should exceed the land, materials and labour costs by some margin. They will also have the satisfaction of a home that is exactly what they want (the planning authorities not withstanding).

Finance arrangements for a self-build project are often more expensive, and less flexible, than those for a completed house. Among mainstream lenders, Norwich & Peterborough Building Society and Skipton Building Society are established in the self-build market. The Ecology Building Society will take on some mortgages, but it prefers eco-friendly projects and property restoration. What's more, it may well be willing to lend on wrecks that other lenders refuse to touch.

Along with its own project management service, Buildstore also "packages" mortgages from other lenders. Its loans also do away with the need for an inspection at every key stage of the construction service, saving time and fees. Borrowers will, however, pay a little more for a Buildstore loan than if they arranged the financing themselves, directly with the lender.

Overall, self-builders should reckon on paying somewhat more for their financing than a buyer of a ready-made house, simply because there are fewer mortgages to choose from. According to brokers Charcol, self-builders should factor in paying no more than 1.5 per cent over the Bank of England base rate, giving a rate of 6.25 per cent. They should not, however, have to pay a lender's standard variable rate: there are better deals on offer.

Buildstore, for example, has a three- and a five-year fixed rate deal with Skipton at 5.09 per cent, as well as one with Lloyds TSB Scotland (although the deal is available in England and Wales, too) at 0.39 per cent over base rate.

And the self-builder should be in a strong position to remortgage once their project is completed as their home will have built up equity as it was being built. The market value of a good self-build should easily exceed the costs by 25 to 30 per cent, although this will depend on local property market conditions.

With this in mind, the prospective self-builder should be looking for a mortgage that offers flexibility but no long-term ties. As long as the property does not employ too many untested construction techniques, the workmanship is good and the self-builder obtains an architect's certificate on completion, it should meet normal lending criteria when it is finished. This allows the owner to shop around for longer-term financing, treating the self-build loan purely as funding for the construction stage.

According to Ray Boulger, senior technical manager at Charcol, self-builders have one further cost to take into account, however: funding somewhere to live during the build. Unless a self-builder's salary is very high in relation to the cost of the project, they are unlikely to be able to fund two properties out of a mortgage.

Selling and renting is one option, but rent can be as costly as a second loan. "If you are already an owner-occupier, you do need to consider financing during the build phase," he says. "Rent may cost as much again as the second mortgage, so you need to ensure you can afford both."

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