How can I finance my self-build?
If you’re seeking to build your own home but are unsure of how to finance your project, there’s a number of different routes that you can take. Read on to find out about the options you have and how to get them.
1. Bridging loans
What are they?
Bridging loans are a short-term finance option used to bridge the gap between a debt becoming due and the main line of credit becoming available. They are often used to complete the purchase of a property before the sale of the existing home, giving you short-term access to money. Bridging loans are also a common means of financing building work. Due to their temporary nature, these loans can be significantly more expensive than a ‘normal’ loan. They have high rates of interest of up to 18% a year, and high admin fees (in some cases they can even cost you more than double the rate of normal mortgage borrowing). However, in most cases, these loans are refinanced with a conventional mortgage one works are complete.
One of the advantages of using a timber kit system such as SDC’s approach is that you can usually refinance your bridging loan once the building is wind and watertight, saving on interest payments.
How do I get one?
There are various providers of bridging loans, from sole-traders to professional bodies regulated by City watchdog the Financial Conduct Authority (FCA). We would recommend the latter as you can be certain that they will take into consideration your individual circumstances and only recommend if it is an appropriate option for you.
If you decide to finance with a bridging loan, it is important to plan your exit strategy – this may be getting a mainstream mortgage, a buy-to-let mortgage or selling the property. Bridging loans are a higher risk option as there is no guarantee that you will be accepted for a mortgage after taking one out, and you will also need to watch out for any hidden costs such as admin fees and legal cost.
- When using a timber kit system you can usually refinance your bridging loan once the building is wind and watertight, saving on interest payments.
- High rates of interest and admin fees
- Higher risk
2. Self-build mortgages
What are they?
Standard residential mortgages are not an option when you are taking on a self-build project – if you’re going down this route you will need to apply for a self-build mortgage. The main difference between the two is that with a self-build mortgage, the funds are released to you in stages as opposed to a single lump sum, reducing the lender’s risk by ensuring that the funds do not run out before the end of the project and are spent as planned.
Typically, you will receive your first stage of funding when you buy the land, the next when you lay the foundations, a further payment when the property is built up to eaves level, and the final installments will be made when the roof is watertight, the interior walls are plastered and upon completion. However, this will vary depending on the lender.
There are two types of self-build mortgage:
If you choose an arrears type mortgage, the stage payments are given once each stage of the build is completed. This is the more conventional type, where the lender will give money to buy the plot (usually between 50% to 85% of the purchase price or value of the land) and then will release the money for the build in stages. The money for each stage is paid out at the end of the stage once the work has been completed and a valuer has visited the site i.e. in arrears of the work being done. This type of self-build mortgage is suitable for those who have a large cash injection of their own to put into the project.
With an advance type mortgage, the stage payments are released at the start of each stage of the build; these are sometimes called “accelerator” mortgages. This type of self-build mortgage removes the need for short-term borrowing/bridging loans to cover the shortfall, as the money is released before labor and materials bills fall due.
Typical stages of fund release:
How do I get one?
It is important to consider that no high street lenders offer self-build finance, however, you can find a list of sources of the bottom of the blog that can assist you in finding a provider.
- Ensures that the funds do not run out before the end of the project and are spent as planned
- “Accelerator” mortgages remove the need for short-term borrowing/bridging loans
- When you have builders that want to press on, you have to wait for the next stage of funding.
- Arrears type self-build mortgages are only suitable for those who have a large cash injection of their own
3. Government loans and grants
The Government provides a range of programmes to help finance multi-unit private homebuilding projects and to support neighbourhood planning. These programmes are available to landowners, developers, builders, enablers, and communities, provided they meet the eligibility criteria. Your local council should be knowledgeable of the funding programmes available in your area and be able to provide you with information about them.
The main programmes are:
- If you are hoping to build as part of a group self-build scheme you may be eligible for a loan under the government’s £150m Custom Build Serviced Plots Loan Fund. This fund supports projects that create five or more serviced building plots for private homebuilders. Note that a slightly different approach is being proposed for the Greater London area.
- The Ministry for Housing, Communities and Local Government (MHCLG formerly DCLG) are providing £23 million of support to groups developing neighborhood plans and neighborhood development orders between 2018-2022 through the Neighbourhood Planning programme.
- The Housing Growth Partnership is a social impact investor backed by Lloyds Bank and Homes England. They are helping to address housing affordability by providing support to the regional residential development community to increase the number of new homes built, making £100m available to small and medium-sized builders to support projects of between five and 75 homes
- The £4.5 billion Home Building Fund exists to support more new homes being built in England. The aim is to support key marginal sectors like the Small and Medium-sized Enterprise (SME) developer market with an increased focus on investment in areas with the highest affordability pressures. You can apply for this funding if you’re a private sector business that builds new homes or prepares sites for housing developments; this includes small builders, community builders, custom builders and regeneration specialists.
- Community Housing Fund – The Fund aims to support an increase in housing supply in England by increasing the number of homes delivered by the community-led housing sector; to provide housing that is affordable at local income levels and remains so in perpetuity; and to deliver a lasting legacy for the community-led housing sector in the form of an effective and financially self-sustaining body of expertise within the house building industry in England.