Self Build Finance for your Dream Home

by John on April 15, 2010

An excellent concise article from Benedict Rohan covers many of the essential points of Self Build Finance for your Dream Home.

Having your very own, custom-built dream home is a lot easier and cheaper than you might think. Although building your own property involves a great deal of planning and hard work, its within the reach of most people, especially now that many mortgage lenders will lend on self-build properties.

Its generally much cheaper to build your own house than it is to buy one pre-built. The average cost of a self-build home is approximately £150,000. The return on investment can be much greater too as soon as its built you can expect an increase in value of 25-30% on what you paid to built it.

One of the major hurdles to overcome when considering a self-build project is obtaining the necessary finance. Some people opt to release equity from their existing mortgage , although this may not raise enough to fund the entire project it depends on the value of the property against the current mortgage on it.

If this is not a feasible option, another possibility is to take out a second mortgage. Many lenders offer specially tailored self-build
mortgage products.

If you go down this route, you will need to decide what to do with your existing property. Work out whether you can afford to have two mortgages on the go during the build, to enable you to live in your current house until the new one is ready or indeed whether there are any mortgage providers prepared to lend you a second mortgage. This can be a convenient way to finance the project, as it means you only have one house move, and mortgage repayments are often cheaper than renting.If you cant afford two mortgages, the other options are to sell your current house and move into rented accommodation, stay with family or friends or even buy a mobile home or caravan to live on the building site. The latter may not be a suitable arrangement if you have a young family.

Self-build mortgages tend to have similar terms and conditions to conventional mortgages. You could have either repayment or interest only, and the interest rates available (fixed, capped, variable, etc) tend to be the same. The two main differences between self-build mortgages and conventional mortgages are that the maximum loan-to-value that will be provided is normally no more than 75% for self-build, as opposed to up to 95% or even 100% for a conventional domestic mortgage, and the funds are released in stages instead of all at once.

The way in which the funds are released depends on the provider. Its normally at key stages of the construction for example the laying of the foundations, when the building is wind and watertight, when the roof is complete, but some lenders release the funds upon completion of the stage, and others in advance. The issue with the former, arrears stage payments, is that the money is not available to fund the construction in advance, so it can cause cash flow problems. Some lenders offer advance stage payments, though, which makes it much easier to keep the cash flowing as the project progresses. Whichever way the lender operates, they will almost certainly want to send a surveyor or valuer to check on the progress of the build before theyrelease each payment.

Sometimes up to a third of the cost of a self-build property is the purchase of the land. There isnt much spare land in the UK so prices are at a premium, particularly in popular built-up areas. Some lenders will be prepared to lend for land purchase, others won’t, or will provide it as a separate loan, so be sure to check this out when doing your research.

Most lenders will want to see the architects drawings and planning permission before agreeing to lend you any money, as well as a schedule of works some lenders will put a time limit on the build, often one year.

As well as being a cheaper way to buy a house, self-build has other financial advantages.

The cost of building a new home is zero-rated for VAT purposes. You also wont be subject to capital gains tax on the capital you make from selling the property, and theres tax relief for financing the new build while remaining in the existing home. Many self-build projects are also exempt from stamp duty as this applies only to the purchase of the land unless the land price is over £60,000.

If you are able to arrange funding to build your own home and are confident that you have the management skills to keep on top of the building work as it progresses, then self-build could be the ideal way for you to get the home of your dreams without it costing an arm and a leg.

{ 7 comments… read them below or add one }

RFID Reader April 18, 2010 at 5:38 pm

One again, your articles is very good.thank you!very much. RFID Reader

Laura April 19, 2010 at 10:00 am

Hi – great first article, very encouraging and motivational words just at the right time for us as my this week task is to begin the search for a self-build lender.

I wonder do you have any advice / recommendation on any of the particular self-build lenders out there – good / bad or indifferent?

Look forward to reading more,
Cheers.

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Clare Darwish May 14, 2010 at 5:14 pm

Can’t think of a more qualified person to be giving this advice. Great article John.

Re Laura’s request, I know that Plotsearch provide self-build funding. Tom McSherry at Livingston is my contact.

Clare

Jim July 27, 2010 at 11:08 am

Hi I was wondering if you can expand on this part:
“You also wont be subject to capital gains tax on the capital you make from selling the property, and theres tax relief for financing the new build while remaining in the existing home.”

From reading the HMRC website I don’t think everyone will be exempt from capital gains tax there is quite a bit more to it than you make out.
Also what are the tax relief for financing the new build while remaining in the existing home? I can’t seem to locate this anywhere?

Cheers Thanks for an interesting read.

Iona Evans September 20, 2010 at 3:46 pm

Hi,

Nice to hear some positive encouragement to selfbuilders. I’m so used to hearing negative comments like “out of their depth” and “not qualified” on the tv. Anyone can selfbuild their own project with enough determination.
Just finished renovating a house, about to embark on a selfbuild in the next few months – and I’m only 25! (and a girl! Gasp.)

Iona

Harold Hatmann April 6, 2011 at 1:36 pm

Wow great article. I really enjoyed reading your blog and thanks for the advices and encouragement. Everyone of us dreaming to own a house and spend the rest of our our lives with our family’s as the saying goes there is no place like home. Looking forward for your next article. Thanks and more power!

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