Financing your self-build with a mortgage

Access to finance along with land are cited as the two biggest hurdles to getting a self-build project off the ground; however, we also know that lenders in the ‘stage release funding arena’ have a healthy appetite to lend to self-builders. So, what do you need to know to achieve success at this early stage of the self-build process?

Specialist self-build/stage release funding mortgage facilitator Mary Riley talks to Sarah Mathieson about self-build mortgages and how to plot a clear path through the mortgage application process.

SM: What is the first thing someone considering a self-build mortgage should do?
MR: It sounds obvious but speaking to an expert who specialises in facilitating stage release funding is key. They will be able to provide information, guidance, and support in relation to what lenders are looking for with regard to supporting documentation, evidence of total project costs, and cash flow. More importantly, they will understand how methods of construction and manufacturing can affect stage payments which are critical to managing your cashflow and keeping your build schedule on track. Mary Riley Solutions (MRS) engages very closely with a panel of F.C.A. registered companies. Jointly MRS and the F.C.A. registered company facilitate the client’s financial journey.

SM: When considering any kind of loan, understanding lending criteria is important. What are the key things self-builders need to know?
MR: As with standard house mortgages, the maximum sum a lender will be prepared to advance is based on the ability of the applicant to repay the mortgage. This is based on an affordability calculation and is also subject to meeting lending criteria which can vary from lender to lender.

SM: What income can be considered when it comes to borrowing limits?
MR: If you are employed, your gross basic salary is usually what is used to determine mortgage size. Subject to bonuses and commissions being paid on a regular basis, a percentage of the regular payments may be taken into account when assessing affordability. This is of course lender dependent. For self-employed individuals, lenders require up to three years of accounts and will be looking at net profit, dividend payments, and HMRC tax calculations over the said period, also business bank statements, etc. For retired individuals, pensionable income is considered. If you are asset-rich, then this may be factored in as additional security. Lenders will also be looking at your borrowing so credit card balances become important – try to pay off large balances before making an application to improve what the lender sees as affordability. However, you also have to factor in; are you depleting your “money pot of cash” that you intend to inject into your self-build project. Have open and transparent discussions with your advisor prior to making major financial decisions.

SM: How much can you typically borrow as a percentage of your project costs?
MR: Lending Institutions will consider lending up to 75% / 80% of total project costs, including land purchase. There is limited access to funding up to 85% of your total project costs (including the cost of the land). Generally, lending institutions will not lend any greater than up to 75%-80% of the end value of your new home.

SM: When you are making an application, what kind of supporting documentation is required?
MR: Your lender will want to see the following before approving a loan; proof of identification, proof of address, evidence of income, committed, and general expenditure. As a minimum, you will be asked for the following: – last three months’ payslips and last three months’ bank statements. A forensic analysis will be carried out on the transactions on your bank statements. For those who are self-employed, SA302’s covering the last 2 years with the latest balance sheet to be no older than 18 months. Last 3 years Tax Overview Statement from HMRC (again latest submission to be no older than 18 months). The Online submissions must include the “submission receipt reference number”, the Unique Taxpayer Reference number, and the HMRC acknowledgment receipt showing the same Unique Taxpayer Reference number. 6 months business bank statements dated within the last 6 months. Latest 6 months bank and 6 months credit card statements (consecutive) as a minimum. Your company accounts and business bank statements are requested. MRS suggests that you access your own credit report, dated within the last two weeks.

You will also be required to submit:

• Evidence of planning permission
• Building regulations approval
• Detailed plans and specifications
• A detailed breakdown of your total project costs
• Quotations for all items with particular attention to big-ticket items. Do not forget landscaping costs.
• Supplier Payment Terms and Cash Flow Analysis
• Confirmation that you have an experienced delivery team in place
• EPC & SAP Calculations (to release the final drawdown) lender dependant
• Site Insurance and Structural Warranty cover. Policy documents will require to be evidenced. In most cases, lenders will want their interest to be noted on the Site Insurance Policy document
• Building regulations sign off certificate (to release the final drawdown)

So as you can see there is a lot of research, planning, and early decision making to be done by the self-builder in advance of securing a mortgage offer.

SM: Do you receive an ‘agreement in principle’ (AIP or DIP (decision in principle)) as with a traditional mortgage?
MR: Yes, on conclusion of initial underwriting and affordability assessment, self-build lenders will issue an agreement in principle to lend subject to meeting lending criteria and all requested supporting documentation being satisfactory to the lender, confirming the details input on a financial questionnaire/fact find document.

SM: What are lenders looking for when considering a project budget?
MR: The structure is the most substantial element of the build, and they will be looking at the method of construction chosen and ensuring the chosen suppliers have suitable accreditation. (e.g., ISO:9001, or STA Assure in the case of timber frame). The total project cost will also be examined in relation to the budgeted cost per square meter to assess that the budget is realistic. It’s important to note that when the lender’s appointed firm of valuers visit the site to carry out the valuation, the current land value and the value of the fully constructed and signed-off property will be established. They will take into account the specification of the self-build build and also the value of comparable units in the local area.

SM: Your list of required documents includes a detailed breakdown of costs; can you provide any additional advice here?
MR: Some lenders will supply a budget template for completion so your costs can be easily slotted into their preferred format. We recommend that you ask for more money than you think you will need, by adding a healthy contingency of around up to 20%. Some lenders’ templates incorporate different rates of contingency for various stages of the build for you to use. If you do not “eat” into the contingency provision, in most instances you are not obliged to draw down the full value of the mortgage offer. Discuss the flexibility you require prior to having a decision in principle carried out.

You also need to be aware of the costs associated with obtaining a mortgage. Lender arrangement fees range from in the region of £500 to up to 1% and in some cases greater than 1%. The lender arrangement fees vary from lender to lender taking into consideration the period you may be tied into the lender and rates of interest. (Early Redemption Charge (ERC); – if you redeem part or all of your borrowing facility within a set period of time). Although the rate of interest is much higher than “standard” mortgage products during the construction phase, generally the self-build lender, lending against your self-build, offers “retention products” on receipt of your completion/habitation certificate. The retention products have reduced rates of interest and you may “switch to the retention product without incurring ERC’s.

Your lender will insist a valuation report is carried out to establish the value of your land and expected end value ahead of your mortgage approval, again with a fee attached. The fee is based on a fee scale associated with the end value of your constructed property. Lenders will also ask for evidence that you have site insurance and a structural warranty provider in place before approving your loan / releasing first funds. To summarise as a minimum, you will incur lender fees, initial and final also interim valuation fees, and legal fees.

SM: How long does the process of securing a self-build mortgage take?
MR: You should allow up to 3 months of mortgage processing time, the processing time is in part determined by the time it takes for you to present all the requested supporting documentation. The time delays are often associated with pulling together evidence of the total construction costs and determining cash flow. You should also factor in time to enable your solicitor to conclude legal matters and request the first drawdown of funds.

SM: Once approved, how do the stage payments work?
MR: The stage payments are generally identified prior to the offer of funding being issued. The first release of funds will be secured against the land / existing structure and will be a % of the purchase price or valuation – the lower of the two. If the land / existing structure are already owned, unencumbered, the first release of funds will be secured against a % of the current value, as provided by the appointed valuer. In most instances, the interim(s) and final release of funds will be determined by the increasing value of the property as the construction phase progresses. For those who own the land / existing structure with funds being released secured against the owned security, funds may then be released in advance of each interim stage. Final funds are then released on a satisfactory final valuation. A small number of lending institutions lend funding in advance of each stage.

SM: What are the mechanisms for releasing the stage payments?
MR: It will depend on the lender. In most cases, interim valuations and final valuations will be conducted. Occasionally photographic evidence of pre-determined stages will be acceptable; however, this is not the norm and determined on a case-by-case basis (e.g., on properties constructed on the Scottish islands or during COVID-19 restrictions).

SM: Typically, what are the different stages?
MR: Indicative initial and interim stage release of funds are:

• Purchase of land
• Groundworks/substructure
• Wall plate/eaves height
• Wind & Watertight
• 1st Fix
• 2nd Fix
• Certified completion

SM: Is there anything to be aware of when it comes to the stages?
MR: Lenders may hold back a small percentage of the budget until the certified completion stage.

SM: What are your top hints for self-build mortgage seekers?
MR: I have lots!

• A lending institution will consider securing first funds against the low point value. The low point value is the value of a plot of land with granted planning permission; however, no value is attributed to the “bricks and mortar” i.e., existing structures on the land that will be replaced when constructing a new dwelling
• Ensure your chosen method of construction is acceptable to lending institutions as suitable security. Fortunately, a greater number of lenders are comfortable with a wide range of Modern Method of Construction (MMC), subject to suitable accreditation
• At an early point consider your budget; own cash and borrowed funds
• Understand manufacturer and delivery team payment terms, this is crucial when establishing cash flow and in deciding if you require funding in arrears or advance
• Have a clear idea of where you will live during the build. Rental costs will affect the lender’s view on affordability; however, making a payment of 12 months’ rent in advance or holding the value of 12 months’ rent in a savings account will not affect your affordability. Again, this is lender dependent. Note that when living in your current property some lenders take your monthly mortgage commitment into consideration when assessing affordability rather than your income being assessed as affording aggregate debt of both mortgages (existing and self-build)
• Remember self-builders can reclaim the VAT on materials purchased. Include VAT in your budget and reclaim this later (see the HMRC website for more information)
• Ensure you do your due diligence when selecting and appointing contracts to ensure the success of your new home
• Research and communication are the ultimate keys to a successful self-build or custom build. Do your homework and assume nothing!
• Build tomorrow’s home today!

Mary Riley is principal at MRS, who provide specialist knowledge, information, guidance, and support in the procurement of self-build funding.

To speak to Mary directly you can contact her via
mary@maryrileysolutions.co.uk
www.maryrileysolutions.co.uk
Tel 01794 399966  Mobile 07808094014

Mary Riley was talking to Sarah Mathieson