Using land as a deposit?

[BrettW]

Hi all,

 

Im new here and just starting out on hopefully a journey to a self-build property, such a great forum here.

 

Now I’m looking into mortgages and wanted to get clarity on something if possible.

 

Shortly land is being gifted to me from my parents, with PP this plot will be worth £100k and I will own it outright, now I see some folks say this can be used as a deposit for when applying for a mortgage…for some reason I can’t work out how this works..

 

So, if we need 200k to build the house on the land how does the land benefit the mortgage?

 

I mean I still need to borrow 200k? How is the land as a deposit factored in? Can I make use of the equity in the land somehow?

 

Sorry if im just not getting it..

 

Thank you.

Brett  

[SteamyTea]

Welcome

I am no expert as not borrowed money for a house in over 30 years now.

But usually it seems that you arrange to borrow a fixed sum, but you get it in stages.  The lender will not release more money until the agreed stage i.e. foundation, is actually in place and signed off.

What they will not do is expose themselves to a greater financial risk.  So by, in effect, owning your land, they know they can get something back at the start. So you hand over £100k of land, they lend you £35k to put a foundation in.  This may increase the value to say £115k.  They will then lean you another £35k to get walls and roofs fitted, increasing the value to £140K.

Why I stopped borrowing money.

[BrettW]

Thanks Steamy Tea,

 

Some good points! 

I guess im asking more so from the mortgage lender, could they lend more on the build cost? Does it help LTV? 

Brett

[Tonymac01]

20 minutes ago, SteamyTea said:

Welcome

I am no expert as not borrowed money for a house in over 30 years now.

But usually it seems that you arrange to borrow a fixed sum, but you get it in stages.  The lender will not release more money until the agreed stage i.e. foundation, is actually in place and signed off.

What they will not do is expose themselves to a greater financial risk.  So by, in effect, owning your land, they know they can get something back at the start. So you hand over £100k of land, they lend you £35k to put a foundation in.  This may increase the value to say £115k.  They will then lean you another £35k to get walls and roofs fitted, increasing the value to £140K.

Why I stopped borrowing money.

Don't get that ? How does he proceed without borrowing ? Surely if, for arguments sake, he had a plot @ £100K, the build cost him £150K, is not going to be worth £230K ??

 

[ragg987]

The value increases as build progresses. And the lender will not want to risk lending above the value at any given point.

 

If the lender is willing to lend to 75% of value at any given point (this is illustrative not definitive), then at pp the value is 100k so they lend 75k. Next stage costs 100k so you use the 75k plus your own 25k and the value increases, so they loan another 75k at this point. Etc.

 

Point is they will not lend over the value so you always have to put your own money in.

[ragg987]

I should mention, the is another option where they lend in advance of the stage rather than in arrears. Not sure how that works in terms of collateral against the risk. I believe interest is higher.

[BrettW]

Thanks Ragg987,

So by offering the land as a deposit banks may loan money sooner than later? Ive always read that you normally need to fund the first stage of a build as money is lent in arrears..

 

Cheers

Brett

[BrettW]

Just now, ragg987 said:

I should mention, the is another option where they lend in advance of the stage rather than in arrears. Not sure how that works in terms of collateral against the risk. I believe interest is higher.

Just seen you latest reply..

 

Brett

[nod]

Regardless of what money or assets you have The lending will ultimately depend on your income 

 

[BrettW]

8 minutes ago, nod said:

Regardless of what money or assets you have The lending will ultimately depend on your income 

 

Oh yes already understood that, im just trying to fully understand all the benefits of owning the land when it comes to mortgages..

 

Cheers

Brett

[nod]

I think the only benefits of owning the plot is that you won’t need to borrow to purchase it 

Make sure that you borrow enough to complete the build As borrowing a bit extra further down the line can prove expensive 

[andyr87]

Hello. 

 

You will still need to borrow £200k regardless if that is what it is going to cost to build. The bank will use the land as for security should there be any issues with the build. They way to think about it is that you are spending £200k on the build, the land is worth £100k so the minimum value at completion is £300k (hopefully more). So you are spending £200k on an asset worth £300k. 

 

The Halifax won't lend to you as the land was gifted. I believe it is a rule introduced to stop people from building in their parents gardens. 

 

We are in a similar situation and have been speaking to various brokers / banks. Not sure where your project is based, but the Scottish Building Society will lend up to £300k and will give you 60% of the value of the land as your initial stage payment which you will be given before you start. However note that they require you to have 10% cash contingency and require proof that you have that. 

 

We have opened up dialogue with Ecology Building Society (see previous topic https://forum.buildhub.org.uk/topic/10588-broker-query/) and the feedback seems to be pretty good as it sounds like you can bypass the broker and do the application yourself. The caveat is that you have to have have a SAP rating of 85 or above for the design to get the more favorable interest rates, which arguably isn't difficult on a new build especially if you are aware of this before you start the design process.

Note that they lend on the basis that the design achieves the SAP rating to achieve a the lower interest rate. I believe that you can revert to a lower SAP rating as the build progresses however you will pay a higher rate of interest. As mentioned we have only just started these discussions so I may be wrong on that one! 

 

The maximum any lender will give you is 4 times your income, or joint income if you are going into this with a partner. 

 

Regardless you are in a fantastic position by owning the land outright as the bank will view you as less of a risk to lend to. We have been though the mill a bit recently with regards to finding the right mortgage for us however are beginning to see light at the end of the tunnel thanks to the feedback from members on this forum. 

 

[ToughButterCup]

9 hours ago, BrettW said:

[...]

im just trying to fully understand all the benefits of owning the land when it comes to mortgages..

[...]

 

In relation to a mortgage, there may be some benefit to owning a plot of  land in respect of money borrowed. But anyone giving you money against the value of land will extract their price. Each company will have different conditions. The best one can say is that a builder is likely to need less money overall.

 

But consider this: have you surveyed the land; do you know what the soil profile is; are there any hidden services; is the land brown-field;  in other words how well does your plot of land lend itself to the building process? Costly, or cheap?

 

[BrettW]

1 hour ago, andyr87 said:

Hello. 

 

You will still need to borrow £200k regardless if that is what it is going to cost to build. The bank will use the land as for security should there be any issues with the build. They way to think about it is that you are spending £200k on the build, the land is worth £100k so the minimum value at completion is £300k (hopefully more). So you are spending £200k on an asset worth £300k. 

 

The Halifax won't lend to you as the land was gifted. I believe it is a rule introduced to stop people from building in their parents gardens. 

 

We are in a similar situation and have been speaking to various brokers / banks. Not sure where your project is based, but the Scottish Building Society will lend up to £300k and will give you 60% of the value of the land as your initial stage payment which you will be given before you start. However note that they require you to have 10% cash contingency and require proof that you have that. 

 

We have opened up dialogue with Ecology Building Society (see previous topic https://forum.buildhub.org.uk/topic/10588-broker-query/) and the feedback seems to be pretty good as it sounds like you can bypass the broker and do the application yourself. The caveat is that you have to have have a SAP rating of 85 or above for the design to get the more favorable interest rates, which arguably isn't difficult on a new build especially if you are aware of this before you start the design process.

Note that they lend on the basis that the design achieves the SAP rating to achieve a the lower interest rate. I believe that you can revert to a lower SAP rating as the build progresses however you will pay a higher rate of interest. As mentioned we have only just started these discussions so I may be wrong on that one! 

 

The maximum any lender will give you is 4 times your income, or joint income if you are going into this with a partner. 

 

Regardless you are in a fantastic position by owning the land outright as the bank will view you as less of a risk to lend to. We have been though the mill a bit recently with regards to finding the right mortgage for us however are beginning to see light at the end of the tunnel thanks to the feedback from members on this forum. 

 

 

Thanks Andy, really useful, yes already came across the Halifax rule, glad things are progressing for you, is Ecology lending 4 times your income? 4 times is what we need ideally, doing this as joint income with my wife.

Did you try Buildstore at all? 

Thanks all.

[andyr87]

@BrettW yes we started off with buildstore but found them difficult to get a hold of. Plus they charge fees whereas you can go directly to Ecology. I have read some good feedback regarding Buildstore on this forum though so shouldn't be dismissed. Ecology will "consider" 4 times joint salary according to their website.

 

@AnonymousBosch makes a valid point regarding the quality of the plot. We had ours surveyed and had trial pits dug out by an engineer. This proved valuable for the architect who was able to use the profile of the plot to our advantage and will hopefully mitigate any potential surprises when we (eventually) break ground as we have a fairly good idea of what we are digging into. Of course there are never any guarantees when it comes to groundworks!

[BrettW]

Thanks @andyr87 makes sense, not designed the house yet but just sent my architect the comment about the SAP rating of 85 or above, could be a way forward! 

Looking to build on my parents garden...see pic to give an indication..planner has been round and feels very confident...

All very new to me! 

Cheers
Brett

 

Edited July 22, 2019 by BrettW

[andyr87]

@BrettW looks good - if you haven't got the land in your name yet I would advice doing this asap. This process took us much longer than anticipated and has ultimately delayed many aspects of our project. 

[ToughButterCup]

Access?

That bit of road to the South West of your plot looks like it's a shared drive. If I'm right, There Be Dragons: sometimes asleep, other times wide awake. If that drive with two red cars in it belongs to the family the dragon is asleep. And will remain asleep.

 

 Whose sewer / other services runs under / over your land? 

[BrettW]

34 minutes ago, AnonymousBosch said:

Access?

That bit of road to the South West of your plot looks like it's a shared drive. If I'm right, There Be Dragons: sometimes asleep, other times wide awake. If that drive with two red cars in it belongs to the family the dragon is asleep. And will remain asleep.

 

 Whose sewer / other services runs under / over your land? 

Its shared access but owned outright by one neighbour (furthest away semi on the right), other neighbour has right of way...we know them, hes in his mid seventies, we know he wants some cash, so feel confident for a deal, just want to be sure we can get the mortgage we need etc bu yes not signed, sealed or delivered by any means

Not gone that far yet with services....any pointers welcome!

Cheers

Edited July 22, 2019 by BrettW

[ToughButterCup]

15 minutes ago, BrettW said:

[...]

we know he wants some cash, so feel confident for a deal,

[...]

 

There's no easy way of sugaring this pill. 

Sort that issue out first: here's why and how.

The following advice is based on a similar issue, and what, for us, could have been a more serious spat. Luckily -in the end- we dealt with an honourable near neighbour. 

 

Why.

Your neighbour has a ransom strip. No matter what's said now, when it comes to formalities things can change in a heartbeat.

 

How.

Talk informally to your neighbour. Outline your case. Raise the issue of access. Make sure  - certain sure - you know how you are going to deal with your access to services.

Propose he / she takes proper formal advice and asks a land agent for a price. Agree a price. Consult a solicitor and make a formal agreement.

 

Easy?

No, it isn't. It could be. But, there's so much emotion wrapped up in all this, it's very hard to maintain a professional level of detachment and objectivity.

Good luck,

Ian

[Temp]

13 hours ago, BrettW said:

Shortly land is being gifted to me from my parents, with PP this plot will be worth £100k and I will own it outright, now I see some folks say this can be used as a deposit for when applying for a mortgage…for some reason I can’t work out how this works..

 

I hate the word deposit...

 

When you buy any house (including one already built) the bank is interested in the loan to value ratio. Regardless of how much you borrow the bank usually holds the whole house and land as security. If you borrow 80% of the value the remaining 20% is usually referred to as a deposit but a better name for it would be "additional security" because its additional security the bank has if you default. It covers their ass if they have to sell after house prices have fallen.  

 

One possibility is that you might be able to (and want to) borrow a bit more than the estimated build cost. For example if the build cost is £250K and the land is valued at £100K you might be able to borrow 80% of £350K  = £280k giving you £30K of contingency. 

 

Other matters:

 

There are some legal issues associated with gifts of land. One is that you must formally accept the gift or it can be invalid. That might leave you and their estate with an IHT bill (even if they survive 7 years). So write your parents a nice thank you letter once the plot is registered in your name(s) at the land registry and make sure they keep it with their will.

 

Your parents may also face a CGT bill if the land isn't currently part of their principle private residence (even if they give it to you for £0). CGT would be calculated on the market value less their GCT allowances at the time of the gift. Depending on their tax situation it might well be better for you to get PP after they have gifted you the land not before. eg because getting PP will increase the value a lot.

 

 

 

[BrettW]

14 minutes ago, AnonymousBosch said:

 

There's no easy way of sugaring this pill. 

Sort that issue out first: here's why and how.

The following advice is based on a similar issue, and what, for us, could have been a more serious spat. Luckily -in the end- we dealt with an honourable near neighbour. 

 

Why.

Your neighbour has a ransom strip. No matter what's said now, when it comes to formalities things can change in a heartbeat.

 

How.

Talk informally to your neighbour. Outline your case. Raise the issue of access. Make sure  - certain sure - you know how you are going to deal with your access to services.

Propose he / she takes proper formal advice and asks a land agent for a price. Agree a price. Consult a solicitor and make a formal agreement.

 

Easy?

No, it isn't. It could be. But, there's so much emotion wrapped up in all this, it's very hard to maintain a professional level of detachment and objectivity.

Good luck,

Ian

 

Thanks Ian, all really helpful, we are literally going to talk to him as soon as i hear back about mortgages options, even maybe later this week, as you say, will talk to him face to face and do my pitch! 

Services wise the planner we had round said we could just make use of my parents services in theory...

Cheers

[BrettW]

14 minutes ago, Temp said:

 

I hate the word deposit...

 

When you buy any house (including one already built) the bank is interested in the loan to value ratio. Regardless of how much you borrow the bank usually holds the whole house and land as security. If you borrow 80% of the value the remaining 20% is usually referred to as a deposit but a better name for it would be "additional security" because its additional security the bank has if you default. It covers their ass if they have to sell after house prices have fallen.  

 

One possibility is that you might be able to (and want to) borrow a bit more than the estimated build cost. For example if the build cost is £250K and the land is valued at £100K you might be able to borrow 80% of £350K  = £280k giving you £30K of contingency. 

 

Other matters:

 

There are some legal issues associated with gifts of land. One is that you must formally accept the gift or it can be invalid. That might leave you and their estate with an IHT bill (even if they survive 7 years). So write your parents a nice thank you letter once the plot is registered in your name(s) at the land registry and make sure they keep it with their will.

 

Your parents may also face a CGT bill if the land isn't currently part of their principle private residence (even if they give it to you for £0). CGT would be calculated on the market value less their GCT allowances at the time of the gift. Depending on their tax situation it might well be better for you to get PP after they have gifted you the land not before. eg because getting PP will increase the value a lot.

 

 

 

 

Thanks Temp! Great advice...

[redtop]

i would get the ransom strip legal stuff done and paid for before getting planning, assuming the ransom strip price isnt onerous.  I know its a risk in case you dont get planning, but once you do, and he takes advice from any ofspring who will inherit his estate, you may find the price goes up.  a lot.

[ToughButterCup]

45 minutes ago, redtop said:

[...]

but once you do, and he takes advice from any offspring who will inherit his estate, you may find the price goes up.  a lot.

 

Bang on.

You won't be talking to just your neighbour, you'll be talking to anyone who has an interest in the estate. That's why it is imperative  you make sure your neighbour takes proper local professional advice.

I would ask a local Estate Agent to value access on your behalf too.

 

Check access to your parents services.