How to use current house to finance self build.

[Tony99]

Looking for advice: I have got planning permission for a new house in our garden. It’ll cost around £500-550000 all done (incl some contingency etc). I was going to fund it by selling my house ( worth about £650000 which we own outright) then renting or caravan while the house is being built. But for various reasons we are now looking to stay in our house while the new one is being built in the garden. We will need to borrow around £500000 for the build and then pay it back once the new house is built and we’ve sold our house. 

What are my best options??

[ProDave]

The problem with borrowing £500K is you need the salary to support that kind of loan. That will be your first hurdle.  then you will need the lenders permission to take away half (or more) of the garden to build the new house.

 

Sold old house and caravan on site will be a lot less complicated.

[lizzie]

Hi Tony and welcome.

 

Agree with proDave, unless you can support a loan of that size etc it could be a bit tricky.

 

If you have a good income and as you own the plot you could go down the self build mortgage route with chunks being released as you complete stages of the build.  That may be a cheaper route as you only pay on what you borrow.  Ecology or Build-zone may be worth looking at for a self build mortgage. You need to fund build stages and get paid in arrears generally though.

 

The building in the garden route can also be tricky on selling.  If you are selling and then building afterwards make sure the site is fenced off and as unobtrusive as possible from existing house or it could affect a sale.  Who wants to live next door to a building site and pay top dollar to do so. Building first and then selling is a safer option.

 

@Hecateh is building in her garden...sure she will be along to tell you about it.

 

Good luck...in my experience it will cost a lot more than you think and take a lot longer but it's a bit like childbirth (so they say) all forgotten when you actually achieve the goal.

[Tony99]

Thanks. Agreed- difficulty to sell a house with building works in the garden! I suppose what I need is a loan for a year that I could pay off when I sell my current house- aren’t the self build mortgages for people who are looking to pay off the loan sum over many years?

[lizzie]

@Tony99 I think people like Ecology expect you to remortgage once build finished.  Even if you have a mortgage that is over a longer term you can pay it off early - just check the penalties - of course that depends on you being young enough to have a mortgage over a longer period..........If you are looking for a loan for a year that is almost a bridging.  The repayments on that would be sizeable.  I am not sure anyone would do an interest only 'mortgage' for a year (and undoubtedly you will need longer), I think - and I am not qualified to give financial advice - best bet is to investigate an interest only mortgage with lowest interest rate and cheapest early redemption penalties, as long as you have the income to qualify for the loan. On the sort of numbers you are talking about above you are looking at about 80% loan to value on your existing house...assuming it values for mortgage purposes at what you think the sale price may be.  The sale/marketing price and the mortgage valuation are rarely the same.

 

Go talk to your bank or a specialist broker if you don't want to explore the self build mortgage route yourself..

[newhome]

I remortgaged my old house initially to pay for the build as it was on the market but hadn’t sold at that point. The old house didn’t have a mortgage so it was straightforward to do. My old house sold a few months into the build so the mortgage was repaid at that point. 

 

So there is risk involved but you could remortgage your existing house for whatever you can secure, use that money to make a start on the build and then try to sell the house in the meantime and move into rented for a bit or a caravan or even get a few rooms habitable so you can move in, but selling a house during building works may be difficult. 

 

550k is quite a big budget. Assume you have verified that this is in the right ballpark for the build? 

 

 

[lizzie]

@Tony99 Incidentally we sold our house moved into rented so the cash for the build was in the bank........build took a year longer than planned and went hugely over budget.  The best plans etc.......

[Ferdinand]

There are tax aspects to this arrangement eg CGT.

 

Take advice. 

[Jeremy Harris]

6 minutes ago, Ferdinand said:

There are tax aspects to this arrangement eg CGT.

 

Take advice. 

 

 

There are indeed, as mortgaging our existing house is something we did for part of our financing.  We had no mortgage on the old house, so taking one out on just a small part of its value was no problem.  The potential problem arises when you come to move house and sell, as this needs timing carefully we've been advised.  Our new build is complete, but we've delayed moving into it as we do not want it to be classified as our principal residence, as that could make our old house a CGT liability when we sell.  As long as our principal residence is the old house we're OK, I believe.

 

It all hinges on timing, and although we've been advised that we might get a short period of grace if we moved into the new house before selling the old one, this was by no means guaranteed, and we could face paying CGT on the difference between what we paid for the old house in 2000 and what it sells for. 

 

We are currently in the process of selling the old house, and once we have exchanged contracts we'll move to the new build officially, changing all the address details for banks etc  over to the new address.  At that point it's just like a house move, where we will be moving from one house to another, so there shouldn't be a CGT liability.

 

[Ferdinand]

6 minutes ago, JSHarris said:

 

 

There are indeed, as mortgaging our existing house is something we did for part of our financing.  We had no mortgage on the old house, so taking one out on just a small part of its value was no problem.  The potential problem arises when you come to move house and sell, as this needs timing carefully we've been advised.  Our new build is complete, but we've delayed moving into it as we do not want it to be classified as our principal residence, as that could make our old house a CGT liability when we sell.  As long as our principal residence is the old house we're OK, I believe.

 

It all hinges on timing, and although we've been advised that we might get a short period of grace if we moved into the new house before selling the old one, this was by no means guaranteed, and we could face paying CGT on the difference between what we paid for the old house in 2000 and what it sells for. 

 

We are currently in the process of selling the old house, and once we have exchanged contracts we'll move to the new build officially, changing all the address details for banks etc  over to the new address.  At that point it's just like a house move, where we will be moving from one house to another, so there shouldn't be a CGT liability.

 

 

Plus around building in your own garden I think.

[Hecateh]

Hi Tony, Welcome and as @lizzie says  I am building in my garden.

 

Mine is on a much smaller scale and at the end of a cul de sac so selling this one first was definitely a no no.

 

No income to support a proper mortgage so had to go down the bridging loan route.  Quote was ridiculously high but the only way forward (about 10%) but by the time I got round to actually getting the loan interest rates had increased slightly but bridging loan hugely so I am accruing 13% interest.  This house was valued at  250k with the garden by estate agents but only 200k by the mortgage company and they would only lend me 125k  Oh - and their claim is over the whole plot not just the original house.  Arrangements costs were astronomical and the insisted on a 10 year warranty costing 2.5k which is underwritten by Alpha who have just gone  bust.  

 

The original build quote was less than 100k and a budgeted 130k to cover utilities etc (about 5k) and a healthy 25% contingency.  

 

Things went badly from the start.  Sloping site so extra 13k on foundations (that could have been at least partly averted had I known about this place back then) and then 13k for electricity as supply at the end of the drive was at capacity to had to come 50m down the road.  

 

Scary but ok - it's in the contingency, nothing else major can go wrong; can it?  

 

It certainly can. 

 

Cutting a long story short - my builder told me just before roof on stage that walls, floors, plaster, doors, windows and plumbing were not in the quote and it was my fault because I hadn't specified them.  Wanted another 46k to finish.  Not possible.  Got him to finish the roof and dispensed with his services.  Limped along since then trying to project manage myself with lots and lots of help from people on here, (on and off the forum).

 

Have had to put this one up for sale which I didn't want to do until I moved, although not exactly a building site as such anymore it's still not attractive as there is no drive or garden just a load of hardcore and part of the garden in the 'to sell' bit is just bare earth that I can't do anything with yet as I need to move a load of topsoil off it.  

 

Have had to borrow money from family and on credit card.  The bridge is due for repayment in November and I feel permanently sick and wake up around 4am most mornings with no chance of going back to sleep.  

 

Not trying to put you off but self builds are very very stressful, especially if you are unable to actually get involved in the build yourself or even fully understand what is going on.  That is one area this place has been a lifesaver as whatever questions you have someone will either know the answer or be able to point you in the right direction.  Emotional support and banter also freely available

 

Self builds frequently go over budget, again even more so if you are not experienced in the trades.

 

Self builds almost invariably take longer than expected.  

 

Having said all that - you've started well by finding this place and you have a healthy budget, so may be able to scale back if some things come in over.  

 

Pictures and plans are always of interest

 

 

 

 

 

 

[ProDave]

Since we are doing "what can possibly go wrong"

 

Well we bought the plot, started the build, put the old house on the market, and gave up after 2 1/2 years on the market with no buyer.

 

Now limping along as a self builder hardly employing anyone else, and building as and when we can afford it.

 

The good news is when we eventually sell the old one, we will have more left over than we ever expected, but boy it has been hard and frustrating.

[mike2016]

Am building in my side garden but will sell the house before I start. Means the tender quotes from the builder will expire and go up but there's no way to bridge the financing and get anywhere decent without risking both homes, new and old. There's a buy to let mortgage I could convert to but I'd only be able to use it to borrow a small amount of the build cost and the bank wouldn't go for that as they'd have a half finished house. I got the old house priced at 300-310K (minus side garden), side garden 120K with planning, new house worth 345K currently. Will be able to get 80% of 345K in a new mortgage once I sell old house and finish the build which I expect to be around 250-260K. Currently at the stage where I have planning and am heading out to tender next....sell old house early next year and go from there.....

[TerryE]

We managed this -- by the skin of our teeth.   We built our new house at the bottom of the garden. 

• We started our build using our savings. This got us through all the costs of design, planning and works up to warm slab.  We borrowed from the kids to make the first stage payment on the frame.
• As with the others we took out a mortgage on our old house (which was otherwise unencumbered) up to the limit of the value that I could get on my company pension.  We were quite open that we were using this in effect as a bridging loan and in fact the Monmouth BS allowed us to have an interest only mortgage at ~1¼% for the first 2 years.
• Once the boundary fence was up and the outside skin was complete (so the house looked like it was complete from the old house) we put the old one on the market.  BTW, prospective buyers look on a building site next door as a risk and a hassle, so this is going to impact on the price and ease of sale.  It is far better to do as we did.  Even so, it took about a year to find the right buyer and in the end we completed the month that the MonBS mortgage went from ~1¼% to 4%.
• Even so the mortgage lump sum wasn't enough, once we paid back the kids so we ended up borrowing from them towards the end again to get to the point where we could at least move in.  But one the sale on the old house completed, we could clear off the mortgage and do all of the finishing off.

If you are looking for cash to bridge the build period, that your lender needs to be able to view it as a low risk hassle-free loan to get a decent rate. In our case the money was about a third of the value of our farmhouse and I passed the affordability assessment based on  my pension income.   A loan for 80% of the value, with a new development on an adjacent plot is not low risk.  We also had our new build planning approvals and the plans available, so even though the new build was outside the scope of our mortgage we had a clear exit strategy.  Getting to this point can take 1-2 years or more, so it make no sense to be paying interest payments during this period if you have enough liquid savings to cover this phase.

 

£500K seems very expensive for a build without the price of the plot.  You can build a nice 4-bed detached house for  under £300K so long as you resist the temptation to create a grand design.  Also a surprising amount of the bill is after 2nd fit, so another option is to look at the minimum  requirements for "lawful development" , which IIRC are basically that you have a weather-proof living space, running water and waste, toilet, shower and some form of cooking arrangement.  Once you are weather-proof, you could arrange to temporarily fit out 1-2 rooms to qualify and once you've got the certificate there is nothing to stop you completing on the old house sale and legally moving in to the new house.  So if you are looking at the type of build that I suggested then you might be able to get your loan requirement down to ~200-250K which means that you need ~50K income with minimum commitments to get this sort of loan, as well as being healthy, etc.

Edited July 19, 2018 by TerryE

[recoveringbuilder]

We are currently building in what was part of our garden, this is our third self build and it’s the second time we’ve stayed in a caravan during the build. I suppose we may have been lucky that both times the buyer of our old house had no qualms about us building.We would not have had the income to support a loan to do the build before selling the old house so it was our only way forward. The first time we spent 18months in the caravan as we did a lot of the work ourselves mostly due to tradesmen who wouldn’t commit to the job but in the end we ended up with a 385m2 house which cost us well under its value although we did end up with a small mortgage. This time we had no mortgage so all the money is going into this build but we have employed a main contractor to get it done quicker with us supplying all the materials, there can be no mortgage this time as we haven’t enough working years left. I agree with everyone else though, no matter what route you take there are always problems and plenty of stress!

[Hecateh]

Just one thing to add.  I am really regretting doing this at the moment AND it certainly isn't going to leave me with a lump sum at the end which was going to pay my way for the next 2 years and then supplement my pension once I reach state pension age.  I am probably going to have to go back to work (after being 'retired' for 3 years once I move into the new house.  

 

BUT once I am in there, despite all the compromises I have had to make and despite not having the money left at the end of it all. I won't regret doing it as much as I would have regretted not doing it.

 

If I hadn't done it I would have forever wished I did.  In my imagination I would have known it would have been stressful and that some things would have cost more, caused stress or just been so frustrating but I would never have predicted this so I would have regretted it for the rest of my life.  

[jonM]

On 19/07/2018 at 16:45, newhome said:

I remortgaged my old house initially to pay for the build as it was on the market but hadn’t sold at that point. The old house didn’t have a mortgage so it was straightforward to do. My old house sold a few months into the build so the mortgage was repaid at that point. 

@newhome Could I ask who you remortgaged with ? I have approached a couple of lenders who have said that they won't lend for the purpose of financing a self-build in that way. 

[newhome]

33 minutes ago, jonM said:

@newhome Could I ask who you remortgaged with ? I have approached a couple of lenders who have said that they won't lend for the purpose of financing a self-build in that way. 

 

I think I said it was to release funds to finance a second home, never mentioned self build. They may be more cautious these days I guess since the banking crisis as it was a while ago. I remortgaged in 2009 with C&G. I wanted 80% LTV and they would only give me 75%. That was based on the reason for the loan not affordability. I had no mortgage on the property so had 100% equity. In the event I could have got away with not remortgaging as the house sold before my savings ran out but it was close and I didn’t want to be in the position where I couldn’t afford to continue as I had run out of funds. 

 

If you can’t find a lender who will do this for you maybe go via a broker but don’t apply and then get rejected as it will then affect your credit score.