Financing a Self Build Property

Financing a Self Build Property

Investors are becoming increasingly aware of the money that can be made out of building property. This is all well and good; however, the financing of these ventures can be very complicated, putting many investors off an otherwise sound investment. Don’t be one of them!

Buying Land

Buying land in order to develop one or more properties is generally considered a sound financial investment, particularly for those with building experience who can cut the build costs to a minimum. Having said this, the process can be a lot harder, with plenty of hurdles that can easily trip up the inexperienced investor.

Financing is a huge issue for investors looking to self build; not only does the cash have to be raised to purchase the land, but there are also the regular payments that will be due to builders, architects and other professionals, along the way. A traditional mortgage is normally out of the question as companies will be reluctant to offer finance secured on a house that is not yet built. In addition, the cost of building a property often over-runs dramatically and developers could find themselves in a position of running out of funds, before the project is complete.

Many mortgage companies have realised that the issue of finance can prevent otherwise lucrative investments from going ahead. Based on this, there is now a wide range of ‘self build mortgages’ or ‘stage payment mortgages’ as they are often referred to by banks and brokers. Currently, there are approximately 50 self build mortgages available and although traditionally these were provided by specialist lenders, the trend has moved towards more mainstream establishments offering the same facilities, namely HSBC and Halifax.

Every lender has a different set of criteria although, as a general rule, a mortgage provider will not normally provide more than 75 percent of the cost of the building plot itself and not more than around 60 percent of the build cost of the property. Having said this, if cash is particularly tight, there are some specialist lenders such as Buildstore which will lend up to 95 percent of the value of the building plot. If you are looking for a large amount of financing, a specialist lender may be a better bet; alternatively, it may be possible to take out a personal loan, although these rates can be substantially higher and, therefore, have a negative impact on your potential profit. Another often favoured option is to take a larger mortgage on the current family home to make up the shortfall. This, however, has a degree of risk attached, because if you fail to make both payments, you could potentially find yourself homeless and investment-less!

Self build mortgages are normally paid out in five stages. This is a great way of going about the process of self build, as investors are not then paying interest on finance that they do not yet require. This is also very useful for controlling adequate budgeting and for helping new developers ensure that no one stage of the build runs terribly over budget.

The first stage will be the acquisition of the land although, as previously mentioned, it is unusual to receive more than 75 percent of the actual purchase cost. The second stage will be paid out at the completion of the foundations, third at the completion of the roof plate, fourth at the completion of the plastering and the final stage at the completion of the property.

Bear in mind that mortgage lenders are likely to require regular visits by their personnel for valuation purposes and to ensure that the final build is worth the amount of money that is being loaned by the bank.

Do not be put off by the complications of a self build mortgage; for those who battle through the paperwork, there is plenty of profit to be made!

For more information on self build mortgages, take a look at these sites:

www.selfbuild-mortgages.co.uk
www.selfbuildit.co.uk
www.projectmortgages.co.uk