Property finance expert, Michelle Niziol is the founder and director of IMS Independent Mortgage Solutions in Bicester.
Michelle talks about exciting times ahead for Bicester, and the demand she has seen among people wanting to build their own homes. Michelle explains what a self-build mortgage is, and identifies 10 factors that potential self-build mortgage’s should bear in mind.
It is hard to keep up with the current developments in Bicester, for it has really expanded over recent years and fast become the place to live and work. The town centre has had £70m spent on its redevelopment, not to mention the new Bicester Village train station and creation of over 20,000 new jobs and 10,000 new houses by 2040. The population of Bicester is predicted to grow by approximately 1,000 people per year over the next two decades. In every way, Bicester is rising to become an important economic centre within the region.
Given the huge increase of business activity, and new housing schemes, such as Graven Hill it is inevitable that people will want to re-locate. Graven Hill, indeed, is set to become the UK’s largest, most innovative self-build community, delivering a diverse mix of accommodation from luxury housing to affordable homes.
Perhaps you have taken inspiration to build your own home, Michelle Niziol explains all you need to know about self-build mortgages. Whilst it is a relatively small market at the moment, the desire and demand to build your own home, is both a dream and a business likely to grow. According to the National Self-Build Association, there are 6 million people in the UK who want to build their own house, and around one million of them have already started the planning process. The government seem keen to support the movement, having provided £30 million a few years ago to pump-prime the production of self-build properties, and more measures to foster further activity in the sector are anticipated. Although building your own home to a style, design, quality and location of your choice, with added extras such as enhanced energy efficiency and special security systems, is extremely appealing, it is not a task to be taken lightly. But first, you must find the necessary finance.
By definition, a self-build mortgage is a home loan taken out on a property you are building yourself with the distinguishing characteristic that there are stage payments. If there are no such payments by the stage of completion, or they are so back-loaded in the construction process as to make them virtually meaningless, then it’s not a real self-build mortgage.
Until recently, there was not a wide range of mortgage options available, it being something of a niche market.
Over the past few years, however, there has been a growing number of mortgage brokers specialising in self-build mortgages entering the market-place, and many of the traditional mortgage providers have to begin to show an increasing interest in offering self-build funding arrangements.
Again, the characteristic feature of self-build mortgages is that the lender releases the loan in stages as the house is completed. Typically, there are five payment stages during the construction process along the following lines: Plot; Purchase; Foundations; Wall Plate; Weathertight; First Fix; and Completion.
Commonly stage payments were released ‘in arrears’ of work being completed, and after inspection and verification. More recently, however, some mortgage lenders specialising in self-build mortgages have developed an ‘in advance’, or ‘accelerator’, type of product allowing payments to be made ahead of stages being started, thereby avoiding the need for expensive bridging finance to be put in place. Arrears payments, of course, might be perfectly acceptable to those who have a substantial cash investment of their own to put into the project. Otherwise, there can be the risk of cash shortfalls and consequent delays in building.
Interest rates for self-build mortgages tend to be a margin higher when compared to conventional property mortgages, though lending criteria invariably will be judged on affordability in much the same way. In essence, moreover, self-build mortgages and regular mortgages are similarly available in varying forms from full repayment to interest only.
Understandably, charges are usually a little higher on self-build mortgages to take account of the extra involvement and administration on the part of the lender. Aspiring borrowers should, therefore, allow an additional £2,500 or so to reflect the added costs of application, brokerage and completion fees.
Although it is possible to secure advance payments to provide for up to 90% of land and building costs, 75% of cost is often the most many lenders will release, retaining the residue until full completion. Deposits can also be as high as 40% where risk is deemed to be greater than normal.
From our experience, there are a number of other factors that potential self-build mortgagees should bear in mind.
- When in doubt, always use professional consultants such as architects, surveyors, building contractors, engineers and the like.
- Allow time for contingencies and possible payment of rent for alternative accommodation during the development programme.
- Undertake research on all aspects of planning, design, construction, finance, materials, cost and value.
- Recognise that the lender will want to see detailed plans of the proposed property, its cost and necessary approvals.
- Be aware that there could be penalties for early repayment.
- Likewise, remember, to check any existing mortgage for early repayment penalties.
- Appreciate that ‘affordability’ tests might be more stringent.
- Understand that the lender will carry out regular inspections and valuations before signing-off instalments of the funds.
- Explore the savings that might be made in Stamp Duty.
- Consider changing your rate upon completion, and even flipping to repayment terms if appropriate.
Most of all, naturally, use a top-class mortgage broker and financial adviser.
But then we would say that wouldn’t we!
