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Richard Campo talks us through self-build mortgages.
Is it hard to get a self-build mortgage?
Not as long as you’ve got a good income and a good deposit. This is a complicated area and as always it’s driven on three factors: Capacity, Commitment and Collateral. Lenders want to make sure you’ve got the capacity for the loan, which is your income, and the collateral here isn’t built yet. That means the risk level for the banks is very high.
So if you don’t know where to go this can be a very difficult and time consuming thing to do. I want to try and keep this simple but if anything isn’t clear, just talk to the team and we can go into as much detail as you like.
Are self-build mortgages more expensive?
A broker would always find the best terms, but it’s all relative to the risk you’re taking. So if you look at a self-build, it will be more expensive than the country’s biggest lender. Of course it is, because there’s more risk.
Do you need planning permission for a self-build mortgage?
Yes, that is literally the number one point. Not long ago one of my clients built a house in the back garden and didn’t get planning. Thankfully it was all fine as they lived in a spacious area and very fortunately their neighbours didn’t object.
If you’re even considering doing this, talk to a broker first because aside from the financial side, you’ve got the planning process to go through. Planning is an absolute essential that would be a half hour podcast topic in itself.
I’d suggest looking around your area, talking to some surveyors and viewing local planning applications. I live in a classic leafy area and if anyone attempts to build flats around here they’ll be shot down in flames. So look at the precedent for what you can do – that’ll give you a fairly good guide, but please do get that done before a shovel hits the ground.
Do many lenders offer self-build mortgages?
Probably not, although this varies over time – it depends what the market is doing. We’re talking in March 2023 coming off the back of the mini budget which shocked the financial market. So right now there’s not a lot of choice.
There are a few specialist providers and building societies that are fantastic in this space. At the upper end, private banks are excellent as well. But when the market is contracted, there are fewer options; when the market is a bit easier there are more – but then that’s true of everything.
We tend to work with the banks with serious form in this area – that have done it before and know what they’re doing. You don’t really want a bank coming in and not really understanding this because it could get quite messy.
How does the application process differ for a self-build mortgage?
The application process itself is pretty much the same. The difference is the front and the back end. With the application we’ll research it all, apply to a bank and do all the documents. We’ll assess your credit profile and affordability at the Agreement in Principle stage.
Then you’ll go off and find a builder or contractor, depending on how big the project is. You need to negotiate with them and get a window when they can do the work. Once that’s all done then we’ll submit the application and get your finance underway.
There’s a couple of differences depending whether you’re buying the land or you already own it. Once the application’s in and you’re doing the work, the back end bit that’s different is ‘staged drawdowns’.
Let’s take a simple example. The first stage might be to buy the land. The second stage will be when building works commence. There might be two or three points at which you’ve agreed to pay the contractor or builder. You don’t want to borrow all the money on day one, because you’ll acquire a lot of interest in that process. There’s no point having money sitting around doing nothing.
So we’ll work to get you as much cash as you need at these various different stages. Building a house can take a year or two years, depending on how big the project is.
There’s a really key thing called the Gross Development Value or GDV. Most banks want to keep a certain threshold below that total value. Over time, the value of the land and the property goes up, and so does the borrowing. You want those two things to go hand-in-hand. And that’s how the process differs from any other mortgage.
How much deposit do I need for a self-build mortgage?
The market is a bit tighter at the moment, so generally you need a 25% deposit. You can probably get away with 20% and if you have other property it might be a little bit less.
Let’s say you buy a piece of land for £100,000 and put £20,000 down on day one. Most banks will agree to fund 80% of the build work. So if the land is £100,000 so you borrow £80,000 on that. Then if the build cost £100,000 the bank would lend you another £80,000.
I mentioned that end value – and we tend to find that those stages go up in thirds: what you buy the land for and what you do the work for. Then if you double that it gives you a rough Gross Development Value. In that example, we have got £160,000 worth of borrowing on an asset worth £300,000. That’s why banks like doing this and it’s one of the attractions of building your own home. You’re paying around two-thirds of the cost of buying a comparable property.
For those of us that live around London and the home counties it’s very conceivable. You could spend £750,000 and get a property that’s worth well over a million at the end of it. So as long as you’re willing to take the risk and go through all these hoops it can be a really really good financial decision.
The example I gave was very vanilla, and doesn’t allow for you having more than a 25% deposit. If you have more than that available, great. You should always utilise your cash first. If you’ve got interest outstanding on the loan for a year or two that does accrue a lot. So always use your cash first.
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Do you need to own the land for a self-build mortgage?
No, you don’t need to, as per the example a moment ago. Buying an empty plot of land is probably the most simplistic route. I have had clients knock down the building they live in – they might have bought an old property and rather than renovate it they knock it down and start again.
You can do something called splitting a title. Let’s say you have a property with a very big garden or a bit of land attached – you could make that two different titles with the Land Registry and build a house on the other bit of land. Some people often sell to developers to do that sort of thing.
Can you get a mortgage on a half-built house?
I alluded to this when I said about using cash first. Banks always ask “is the property habitable?” which means it needs to have running water and power. At that point we can probably go to any main high street bank for a mortgage.
Being ‘wind and watertight’ is another test. So if it’s wind and watertight we go to one set of lenders that take more risk, if it isn’t, we go to another set. Either way it’s absolutely fine, but the state of the property determines what bank we go to.
What credit score do you need to buy land?
The usual rules apply, so if you have had credit blips in the past it’s not the end of the world. However, because the bank is already taking a lot of risk on the property, your credit does probably need to be on the clean side.
If you’ve had major credit issues in the last two years I think you’re going to struggle. But equally if you’ve had credit issues more than six years ago, they fall off your credit file anyway. A lot of people don’t realise that. Your credit file is much like your driving licence. Sometimes you get some points but they fall off after a period of time.
There are two key timelines for mortgages. If it’s clean for the last two years you should be okay, and certainly if it’s more than six years ago you’re absolutely fine because banks don’t even look back that far.
How are self-build mortgages calculated?
The Gross Development Value is the big one, and generally you need about 20% deposit so those are the main focuses for the lender.
It’s important to be sure of your numbers. This goes back to the planning point. You will have your plans and estimations but when you do get finance for this, the bank will typically appoint their own quantity surveyor as well. They will check your build at the various points and make sure they agree with your valuation.
So it’s all well and good you doing your figures, but if you’re too optimistic it could fall down – and this is one of the big risks. You might be at that last stage drawdown and you think your property is worth £750,000, but the bank says it’s worth £600,000 and won’t lend anymore. That would be a big problem, so those calculations are really important. Stick to your plan and agree it with the bank right at the front end, because you don’t want to run out of money 12 or 18 months down the line.
Will a bank finance a fixer-upper? Can you get a mortgage to renovate?
Whether you call it a renovation or a fixer upper, it’s the same sort of thing. We’ve already heard about property needing to be wind and watertight. The first thing we ask a client is whether the property is habitable. If it’s wind and watertight and it’s got running utilities then generally we’re OK, we can use high street lenders again. But if your intention is to knock it down, then no, we can’t use those guys.
If you want to do a loft extension or a side return or simply modernise the property, the majority of the high street lenders will support that. If you’re knocking off massive external walls, digging down or digging out, then it’s probably not for the high street but it’s still not a problem to get a renovation job done.
What else do we need to know about self-build mortgages?
It’s complicated. It’s one of these areas where a lot of handholding is needed. As always, as brokers we do this stuff day in, day out. It might be something you do once in a lifetime and most people don’t ever do it – it’s quite a niche thing.
But it is growing – we’re getting more and more enquiries about it. What we can do is take away the hassle of the money and the lending. The brutal truth is that banks do need a bit of cajoling through the process. We talk about staged drawdowns and some banks will argue that you haven’t hit a certain point and won’t release the money. We can refocus them and persuade them not to hold things up.
Possibly the biggest thing is that we do get access to banks that simply don’t deal with the public. This is complicated, so they want to make sure clients have had good financial advice and support so they can focus on the build. Not only will you get a better outcome through a broker, it will almost certainly be cheaper as well. It all helps, because these things are very expensive when they go wrong.
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