Options to finance a Plot / Build

[Ferdinand]

Yay. 1st in topic.

Given that the mortgage and house market has changed rapidly recently, and may change some more, I think we perhaps need a thread mainly about different ways of financing self-build. I'll do a separate thread about tips and tricks to cope with the volatile environment at present. This post is a combination of what I know, and questions where I don't really know.

Note that this area may change rapidly, and for each category all kinds of limitations apply and homework is critical.

It would be useful if others could add more specific comments for each category, perhaps particularly about specific Buillding Societies and other gaps.

This post is a list of thoughts - not financial advice.

Savings

The most traditional route.

Perhaps pension draw-down (you can currently have 25% of your pension pot tax free at age 55) comes into this category.

Normal Mortgage

Take out a normal mortgage on your existing home.

Self-build Mortgage.

The best known providers are probably Buildstore (who are a broker (?) working with financial institutions) and the Ecology Building Society.

Differences are that some providers will insist you start the build yourself before financing, which reduces your savings and your flexibility.

Some providers may let you borrow against the value of your plot, eg when Outline Planning has been achieved.

Local and regional building societies may have offerings for their area.

Buy to Let Mortgage

If you make your project (or your current house while living in a caravan) a rental, Buy to Let mortgages can be available. In the current market interest rates from around 3 per cent are availalble, with a brokers fee of perhaps £500, which (from where I am sitting) seems cheaper than self-build mortgages.

You will need to talk to a broker.

Build to Let Mortgage

This is a possible future market segment. Make your project a rental, and then pay off the mortgage with a normal one once it is built.

You will need to talk to a broker.

Worthy of note for some expenses:

In a low interest rate envirnoment there are other options for some expenditure:

• Personal Loan. Currently available at around 3-3.5%. At present packages are sometimes done for loyal customers - move your account some time before, or take out another one?
• Credit Card Balance Transfer or Interest Free introductory purchases. These are available for up to around 2 years at present for as little as a 0% fee, or for longer periods as a eg 2% fee.
• Ali-Shuffle: Buy something else at as % interest rate, eg car or nearly new car, to free up the cash for your build.

It goes without saying that the more solid a credit rating you have, the better.

Ferdinand

Edited July 13, 2016 by Ferdinand
'cos anyone who gets it right first time isn't open-minded enough.

[ultramods]

9 minutes ago, Ferdinand said:

 

Given that the mortgage and house market has changed rapidly recently, and will change some more

 

Do you mean since the referendum? I talked to build store about 6 weeks before the referendum and we had a mortgage in principle lined up for once we have sold our house. Do you think I should be speaking to them again?

[Barney12]

28 minutes ago, ultramods said:

Do you mean since the referendum? I talked to build store about 6 weeks before the referendum and we had a mortgage in principle lined up for once we have sold our house. Do you think I should be speaking to them again?

The industry is reporting no changes to mortgage availability in the marketplace since Brexit. If anything rates have lowered and the Bank of England easing certain restriction on liquidity will help further.

[warby]

Once you are over 55 and have a private pension it makes sense to withdraw as much as possible without changing your current tax band and before new governments realize how advantageous the new pension rules are and they change the pension rules again or increase the rates of tax as Osborne threatened.

Both my wife and I do this each year and this was a major contribution to allow us to clear our mortgage but could equally have been used for funding a self build. If your are more in need then you could withdraw more and pay tax at a increased tax rate, i.e.from zero to 20% or from 20% to 40/45 %

[Ferdinand]

42 minutes ago, ultramods said:

Do you mean since the referendum? I talked to build store about 6 weeks before the referendum and we had a mortgage in principle lined up for once we have sold our house. Do you think I should be speaking to them again?

Without giving a specific opinion (sorry) ...

I think anybody needs to be aware of possible changes and how it may affect your particular project. While that may not mean rechecking things every day or every week, it is perhaps a good thing to do it at significant milestones in your project.

Certainly over a several month timespan there have been significant changes, and there is a possibility of an interest rate change soon - which may impact on mortgage products etc, but then the selling process takes 4-8 weeks or more anyway.

Were I currently looking at a new project, I would be having a bigger contingency and working through implications of bigger changes than would have been the case 3 months ago. I might also be inclined to reduce as far as possible the time between making a decision and implementing the decision, so that there is less chance for any sudden changes to undermine my careful workings-out.

Here are a couple of articles looking at post-Brexit mortgages and property. I think it is all more volatile, which can work for or against, so in my opinion an emphasis needs to be on resilience and nimbleness. It is perhaps not a time for taking balls-out risks with projects, so eg do a smaller self-build now with space on site for an extension rather than going up to the neck in mortgage finance.

http://www.telegraph.co.uk/property/buy/carney-advises-mortgage-prudency-what-should-prospective-buyers/

http://www.bbc.co.uk/news/business-36641090

http://uk.businessinsider.com/britains-property-price-analysis-post-brexit-2016-7

Ferdinand

Edited July 13, 2016 by Ferdinand

[Temp]

One builder reported recently (since the vote) that they still expected sales for the year to meet previous expectations. Many of the house builders were up on the news. Barratt currently down about 20% compared to the day before the vote. 

[Hecateh]

I know this is an old thread but I am financing mine slightly differently.  Pension drawdown has given me the upfront costs I need - which are relatively low for various reasons.  (Already own land; building small and fairly basic and located in a Yorkshire ex pit village)

 

I own my house outright; The new build is going to be in my garden so no need to buy land; I live in Yorkshire so prices are still relatively cheap.

 

My mortgage will be a 'bridging loan' for the total cost of the build; on a draw down basis and  with costs and interest rolled up.  

 

The new property is small (split level, with a about 64sqm footprint and about 90sqm floor.  Builder expects to be able to complete build in about 3 months which then gives me 9 months to sell my original property - obviously the quicker I can sell it and pay off the bridging loan the better.  

 

It could be an option for others that have lots of equity and the new build, although being fit for purpose is also about downsizing and future proofing

[Temp]

It won't affect most people but the wealthy should remember that pension funds are outside your estate for inheritance tax purposes where as not all of your house might be. 

[Ian]

6 hours ago, Hecateh said:

Builder expects to be able to complete build in about 3 months 

3 months seems very quick. Surely that can't be for the whole thing from digging foundations to you moving into a fully finished house?

 

Our own build was a similar small size to yours with some similar issues such as a sloping site and it took 8 months start to finish. It would have been possible to finish the build a couple of months earlier if I had built it using a main contractor instead of separate trades and if we hadn't done some of the work ourselves but 3 months would have been totally impossible.

[Ian]

Finance:

we financed our complete build using a mortgage that we had on our existing house - it's an offset savings mortgage which provides a very easy way of getting access to any excess equity you may have on your existing house.

https://www.moneysupermarket.com/mortgages/what-is-an-offset-mortgage/

[Stones]

Agree, 3 months seems to me to be very optimistic. I would work on the basis of at least 6 months. Nothing to stop you marketing your house during the build, although you may prefer to wait until landscaped and tidy.

[ProDave]

I would be mighty impressed if you build even a small house start to finish in 3 months.

 

On the subject of financing and pensions.  I have one small non defined benefits pension.  I will start drawing this early next year when I hit the magic age of 55 that allows me to access it. I intend to put it into a drawdown fund, initially taking the 25% tax free lump um then starting with a low monthly drawdown  with hopefully the flexibility to raise the drawdown amount when I need to.

 

I would not necessarily recommend using a pension to fund a house build, but it makes sense in my case as this is only  small pot that in terms of monthly pension if you took it in a conventoinal way is rather trivial. Plus I have other more worthwhile defined benefits pensions that remain for that purpose.

 

Also when the new house is finished and the old one sold, we should have plenty of capital, free of any "pension" restrictions.

[Mr Punter]

9 hours ago, Ian said:

3 months seems very quick. Surely that can't be for the whole thing from digging foundations to you moving into a fully finished house?

 

Yes but I was interested in @Ferdinand 's comment that the Empire State was 16 month start to finish.