Anyone who’s watched Grand Designs knows that creating your own home can be both intensely rewarding and exceptionally frustrating. While the freedom to create exactly the right environment for yourself and your family is liberating and many self-builders are well-qualified to design a home of their own, securing finance that can be relied upon for the whole project is easier said than done. As with any property development project, self-builds need a steady source of funding in order to meet ongoing expenses, and it’s vital that anyone looking to construct their own home seeks specialist self-build finance from an experienced lender.
Self-build finance is generally not available from banks and mainstream lenders. These financial institutions are chronically risk-averse, and are exceptionally wary of lending to builder-occupier architects. It’s hard enough to get a mortgage for a home that you’ve built yourself, let alone the funds to build it in the first place, so builders usually have to turn to specialist self-build finance lenders in order to secure the funding they need. This enables them to act quickly when funds need to be put in place, and the flexible solutions that can be obtained from these lenders allows builders to borrow in the way that best suits their needs.
While self-build finance is often the most straightforward method to acquire funds for a new-build home, it is not the only method, and architects should never regard finance of this type as a “no-brainer” decision. It’s important to carefully assess how much a project will cost and how long it will take before entering into any contract with a self-build loan provider, because these kinds of loans can be costly when improperly used. As with many other areas of the financial industry, self-build lenders have also had to tighten their belts in the past decade - while the UK Government is reintroducing support for this lending sector, you’ll still need a larger deposit than you would 10 years ago. Before making any decisions, talk to a financial advisor; they’ll be able to steer you towards suitable products for your situation.
Those familiar with the property development sector will already have an idea of the demands facing a self-build project, as similar issues confront new-build developers as well. In short, a self-build project needs to use a lot of money over a long time to create a high-value asset (the property itself), against which the loan will be secured. Financing a project like this isn’t particularly straightforward, and self-build lenders work in a very specific way to ensure that both their and their customer’s needs are met.
The package of capital supplied by the lender is usually split into several different units, or “tranches”. These units are supplied to meet specific needs as the project progresses; the money to buy land will be supplied first, then the money to sink foundations, then the money to fit interior walls. This may sound like a long-winded way of doing things, but there are two very good reasons for doing so. Firstly, the borrower will pay interest on the total amount of money they’re borrowing, so it makes sense to keep this at a minimum as much as possible. There’s no point borrowing the money to fit windows when this won’t happen for another 6 months, paying interest the whole time, so by waiting until the money’s needed borrowers can minimise the overall cost of their borrowing.
Secondly, the lender will want to know that the property being constructed is of sufficient value, because this is an important part of their lending criteria. At each stage along the way they’ll want to check that the property is progressing properly and will eventually attain the value which the builder expects, so gating each phase of construction allows the lender to assess and evaluate the project’s likely worth.
Depending on the lender’s terms and conditions, money for each stage in the construction process may be provided before work begins (“advance stage payment”) or once it’s completed (“arrears”). Arrears loans are more common within the industry, but require the builder to have their own pot of money in order to actually pay for the work to be completed.
Self-builds are as unique as their owners, and no two properties are ever alike. While this can allow builders to create exceptionally valuable houses, it also opens up the potential for failure in a way that commercial property developers aren’t vulnerable to; professional developers build what they know they can sell at a profit, while a self-builder builds what they want to own. This makes the process of applying for a self-build loan a highly personal process, where individual history and experience count for a lot. A professional architect with several complete constructions under their belt stands a better chance of being approved than a first-time builder, since the borrower’s track record plays such an important part in the success of their project.
Another equally important aspect of self-build finance applications is the stability of the borrower’s finances. The borrower will need to provide sufficient security in the form of a charge against their existing home, or against the property under construction (this is part of the reason why lenders value the property at each stage of construction, to ensure that it has sufficient value to secure the next stage of the loan). In addition to this, borrowers must also provide an exit strategy for the loan’s repayment. This either consists of the sale or mortgage of the property, the proceeds of which are used to pay back the self-build loan. It’s vital that builders understand how they’ll secure this money, because a cast-iron exit strategy is one of the key elements in a successful self-build finance application.
There are plenty of lenders in today’s market that offer smart, flexible lending solutions for those who want to create their own homes. It’s important for these self-builders to fully understand what makes this form of finance tick, and to carefully consider how this will match their development plans.
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