Managing your build’s bottom line

Despite the numbers of self-builds growing rapidly, getting the right advice on mortgages can be tricky. David Lownds of Hanley Economic Building Society outlines the basics of self-build financing, and gives some tips on how to manage your build’s budget

Have you ever imagined what your dream home would look like? Would you have an open plan kitchen, a spiral staircase reaching all floors or even floor to ceiling windows? While building a dream home is just a dream for some, for others, it’s a reality.

The self-build trend appears to be sticking around, as more and more people choose to take ownership of the design of their home. Accessibility to more creative solutions and ideas is encouraging self-builders to incorporate aspects they want to have such as a more environmentally friendly home or unique construction types.

Circumstance is also encouraging self- builders out of the oak framed woodwork. Whether it’s parents gifting land to their children, people downsizing and building in their back garden, or first time buyers taking the plunge to create their dream home because of a lack of housing available, circumstance is definitely supporting this growing area.

When thinking about their dream home, most people think about the finished product, the physical bricks and mortar (or steel frame!) but at what stage do you need to think about financing those bricks? Do you know what type of mortgage you need, or what advice to get?

A mortgage to help you build a home is different from a mortgage you may have had before, such as a residential mortgage. For a residential mortgage, a lender would offer you a mortgage for a house that already has plumbing and heating – somewhere that you can move straight into and then make the cosmetic changes to create your home.

Doing things differently

With self-build, of course, there is no house to lend against! It is difficult to assess the risk as a lender and the valuation of the property can fluctuate greatly in comparison with buying a house the traditional way.

Initially arriving at the potential lending amount means a different calculation. Most lenders will require more paperwork upfront such as outline planning permission before looking at a mortgage application. Self-builders will also need to have a good idea of the costings for the project, have a warranty provider in mind and the building plans available before a formal application can be submitted.

A self-build mortgage is there to help you stay financially stable throughout the build, and money is therefore released differently – in most circumstances, it will be offered on a staged payment basis – arrears or advanced (dependent on your lender). These staged payments are arranged in accordance with your costings, so your amounts may differ throughout the build. For example, you may need a higher amount earlier in the process to input your footings, so the remaining staged payments will be smaller.

Some lenders will allow you to have your self-build mortgage on interest-only terms whilst your house is being built. This will keep your monthly mortgage payments as low as possible which in turn improves your cashflow.

Where to find funding

Not all bank and building societies provide self-build mortgages so it’s important to know which ones do.

If you already have a mortgage, start with your existing lender. They may be able to switch your current mortgage to a self-build mortgage with minimum costs attached. If not, contact a local mortgage broker. A good broker will be able to source you the most suitable self-build mortgage for your project.

When considering funding, most lenders will charge fees as well as an interest rate so it’s important to work out the total cost of taking out the mortgage before committing to it. There are a host of fees, from application, product, and valuation to insurance and advice fees to consider.

Getting advice from fellow self-builders

It’s always helpful to speak to others who have already been through the process to get their advice. We’ve supported hundreds of self-build projects, so we spoke to a few of our customers to find out their hints and tips, which will also help with your financing.

Hire a project manager: We’ve all seen and heard of self-build projects where the self-builder is the project manager. Sometimes this can work, but more often than not professionals need to be involved.

Employing a project manager means you have peace of mind that the project is getting a level of focus that you might not be able to provide. Most self-builders have a day job and if small matters are not addressed quickly, they can cause delays and delays often mean increased costs. A good project manager will also save you money as they will ensure the project stays on plan and cost.

Have a contingency: As the old saying goes, look after the pennies, and the pounds will look after themselves. Extra costs do creep in, so you should always have a contingency, but spend that money wisely. It’s easy to be tempted by an all singing, all dancing tap or a copper bath – but is that money wisely spent? Most lenders will require you to have a contingency between 10 and 15 per cent built into your project costings.

Work with an architect on the planning: The planning stage can be the hardest. There are plenty of rules and regulations regarding planning permission, but having outline or full planning permission should be your first goal. Having a local architect working on your project can be beneficial, as they understand what planning officers want for local builds.

David Lownds is head of business development & marketing at Hanley Economic Building Society