Newbie financing advice

[Jenjen]

Hi

Looking for a bit of advice on financing options. Have found a plot of land that’s for sale for £95k with planning permisson (although we would re-design and resubmit)... overall budget for project no more than £450k (including land price). We have £100k cash, around £120k equity in current house so would need to find £230k for the rest.

 

I’m not sure whether it would be best to sell up straight away, bank the equity  then get the usual 5.5% self build mortgage. Using a mixture of self build mortgage and cash for plot purchase.

 

Or.

 

Keep house until toward end of project, get £100k additional borrowings (max we could get based on LtV)  on current mortgage for 2.5% interest (use that to buy plot) and then make arrangements for self build mortgage for remainder. 

 

Not sure if option 1 would help with self build Mortgage as essentially plot would be bought so may be in better position!? 

 

Help! Head is spinning! 

 

 

[Triple07]

Hi @Jenjen, 

unfortunately self building is just 100s and 1000s of these kind of decisions and in my experience it’s never gonna be all perfect but at least you get to decide why!

We have went with what looks like your option 2, we bought the plot with savings then remortgaged our current home allowing us to stay put whilst building. 

The intention was to sell the current property to finance the last stage of the build.

We are 7miles from site which is handy but at times I do think it would have been easier to be living on site but it’s also been very comfortable and reduced stress staying in our current home.

have you thought of where you would stay during the build if you do option 1 and weighed up the financial side of that?

Our house is unfortunately still not sold yet so my advice if you do go with option 2 is ensure you have a back up.

Good luck whatever you decide

[newhome]

Hi @Jenjen, welcome to BuildHub. 

 

I know you say that you have circa 350k available for the actual build but have you started doing any specific costings on the type of house you want to build, and how much that property may be worth once complete? Before deciding how to finance you will really need to see if you can build the house you have in mind for the budget you have set. 

 

For my own build I bought the plot with savings and completed the groundworks. My existing house was on the market but hadn’t sold at the point we needed to order the timber frame so I remortgaged it. It was useless as a place to stay during the build anyway as it was some 400 miles from the plot. A few months later it sold and I was able to complete the build using the equity. 

 

If I was in your position I would probably arrange a self build mortgage upfront and arrange for the initial drawdown to be when you need it. I’m not clear how they would view you having an existing mortgage whether you remortgaged or not so you would need to check that out.  From the mortgage lender’s perspective it would all come down to affordability and risk I imagine plus it’s likely to be lender specific. I probably wouldn’t blow all of your savings on the plot purchase if that wipes out your savings. It’s always useful to have a bit of cash in reserve for a project such as this. 

 

 

 

 

[epsilonGreedy]

From your figures your plot cost is 21% of the total project cost. This is an unusual ratio and suggests you have over specified or oversized the planned house so it might be worth going back to the original assumptions about your self build. The open market is rational and if your final project costs overrun the final projected market value of your house it suggests you are doing something odd.

 

You might already be content with this outcome but before committing to a detailed financial plan, why not present you plan for some open scrutiny and validation here. 

 

 

[PeterW]

2 hours ago, epsilonGreedy said:

From your figures your plot cost is 21% of the total project cost. This is an unusual ratio and suggests you have over specified or oversized the planned house so it might be worth going back to the original assumptions about your self build. The open market is rational and if your final project costs overrun the final projected market value of your house it suggests you are doing something odd.

 

What is unusual about it..??

 

First question for @Jenjen is where is this plot located..? I know of a number of plots (lapsed PP included) that if they were developed then the land would be 17-25%. The old "rule of thumb" for the commercial developers used to be equal thirds of land, build and profit. What is now occuring is the land value driving down and the profit is increasing based on land banking (lots to search on here on this) and the slight increase in build costs.

 

The second question for the OP is "is this a life project or a short term project" as overrunning market pricing becomes irrelevant as long as you stay within the LTV indicated by the mortgage company. They really don't care if you buried your life savings in gold taps and techno-bling as long as they can get a return on the money they put in.  

[ProDave]

5 hours ago, epsilonGreedy said:

From your figures your plot cost is 21% of the total project cost. This is an unusual ratio and suggests you have over specified or oversized the planned house so it might be worth going back to the original assumptions about your self build. The open market is rational and if your final project costs overrun the final projected market value of your house it suggests you are doing something odd.

 

You might already be content with this outcome but before committing to a detailed financial plan, why not present you plan for some open scrutiny and validation here. 

 

 

What is unusual about that?  My plot cost £50K, well down at the bottom end of open market plot values here, and the total cost will be about £220K

[HerbJ]

Our build is at the other end of the scale. We're down in the SE, where plots are very expensive and hard to find - we bought a house and demolished it.

 

So my plot was 50% of the total build cost, approximately.  

[Jenjen]

Thanks so much for all the advice. We haven’t done too much yet by way of budget/costing as we are still at the very early stages. We have a wish list and an overall budget so have a few initial meetings with potential architects etc to ascertain what is and isn’t do-able with the budget. 

 

The plot of land is in a good location in the middle of town in central Scotland, it’s very difficult to find land near me and this is fairly reasonable compared to a few other plots that have been up for sale over the past few years. I didn’t realize there was any form of official ratio but know this is the sort of price we will have to pay for land in our area (if not more).

[newhome]

5 minutes ago, Jenjen said:

I didn’t realize there was any form of official ratio but know this is the sort of price we will have to pay for land in our area (if not more).

 

I don't think there is an official ratio, it's very dependent on where you are purchasing land and what you want to build. As @PeterW says a lot depends on whether you see this as a forever home in which case you may not mind paying more to build the house of your dreams, but if you want the house to be worth at least as much as it cost you to build so that you can sell up and move on one day your sums may have to be a bit different. 

 

It will be worth doing some early investigation on how much it will cost to connect services to the plot. Many people on here have had some nasty surprises in terms of how much the connections have been for electricity, water or sewerage so definitely worth getting some quotes in. That's the sort of area the architects won't help much with. 

 

There are other ways you can save money too, for example employing an Architectural Technician or Architectural Technologist instead of an architect, or getting one of the timber frame companies to do all of the plans through to building warrant once you know what you want to build. Lot of posts on here about such things. 

 

 

[Hecateh]

My plot was free (part of my garden) but probable cost had I sold it (I wish) was between 30 and 50k.  My architect told me I could build my house for 100k, so did my builder.  Currently at 170k and counting.  

 

I wish I had never started - I'm trying to move on but struggling to do so at present.

 

[Jenjen]

We very much see it as a forever home so as long as we don’t end up paying more than it’s eventual value we will be happy to essentially break even. The plot is fully serviced as 2 other houses have recently been built next to it, I checked eight electricity company and was quoted an estimate of £2k for connection fees. I’ll look into the architect technician option too, thanks for the heads up! So many small details make such a huge difference. It’s so overwhelming when you have zero experience of it all. I feel this site is going to be a god send if we end up going down this route! 

[epsilonGreedy]

15 hours ago, PeterW said:

 

What is unusual about it..??

 

First question for @Jenjen is where is this plot located..? I know of a number of plots (lapsed PP included) that if they were developed then the land would be 17-25%. The old "rule of thumb" for the commercial developers used to be equal thirds of land, build and profit. What is now occuring is the land value driving down and the profit is increasing based on land banking (lots to search on here on this) and the slight increase in build costs.

 

The second question for the OP is "is this a life project or a short term project" as overrunning market pricing becomes irrelevant as long as you stay within the LTV indicated by the mortgage company. They really don't care if you buried your life savings in gold taps and techno-bling as long as they can get a return on the money they put in.  

 

You answered your own question in your second paragraph when you stated "the old "rule of thumb" for the commercial developers used to be equal thirds of land, build and profit.". Across a large swath of England plots are priced within a 30% to 40% band of the expected value of the finished house assuming the build is undertaken by an experienced pro builder who does not fritter money away.

 

In your third paragraph you then proceed to agree with my warning to the OP regarding how a self builder can overspend with the result that the finished project overshoots its market value.

Edited August 7, 2018 by epsilonGreedy

[Hecateh]

14 minutes ago, Jenjen said:

 I feel this site is going to be a god send if we end up going down this route! 

 

Echoing the sentiments of many on here.  Many of us regret not finding it sooner than we did.  Don't do anything without checking back on here.  Things that seem straightforward often aren't.  

Many people on here have experience (trade or personal) in so many areas and are more than happy to share their experience. 

[epsilonGreedy]

3 hours ago, ProDave said:

What is unusual about that?  My plot cost £50K, well down at the bottom end of open market plot values here, and the total cost will be about £220K

 

 

Two points:

1. Scottish plot values are noticeably lower than UK averages.
2. You have previously told us about the complex story behind your plot purchase Had you completed your self build within 2 years of plot purchase I assume your plot cost to final value would have been closer to 30%

[newhome]

21 minutes ago, Jenjen said:

and was quoted an estimate of £2k for connection fees.

 

That's pretty good. Mine cost me £1200 9 years ago. Some people have had quotes more than 10 x that amount. Mostly because the nearby supply has been at capacity so they need to pay for new provision to be made. So that is what to get them to confirm; that there is spare capacity within the existing infrastructure to allow your connection. The minute you have to pay for a new provision the costs skyrocket. 

 

This site is very good. There is a huge amount of information here already to look up and digest, and there are people here who can help with your own specific questions in pretty much every area of self building. Just keep asking (with a post in the appropriate forum ...) as this may well help you avoid expensive mistakes or give you options to think about that you may not have considered before. It's very easy to make a mistake, get taken for a ride, or simply be faced with not knowing what to do next and this forum can help with pretty much everything. 

 

 

[PeterW]

9 minutes ago, epsilonGreedy said:

Across a large swath of England plots are priced within a 30% to 40% band of the expected value if the finished house assuming the build is undertaken by an experienced pro builder who does not fritter money away.

 

Based on what logic as that’s a pretty bold statement ..?! As I said, loads around here that are well below the 25% marker.

 

Commercial land banking is even lower - local land price where a developer bought land on the edge of the local village has returned a plot price of £40k plus servicing on a small estate where the houses start at £295k and go to £425k. That’s between 9.5% and 15%. As I said though, the rule of thirds used to be right but that’s long gone now in commercial development. 

 

Smaller single plots or groups of serviced plots command a higher opportunity price - one conversion I’m looking at currently is marketed at £179k for a barn with pp for a 2 bed conversion which has already had offers of £50k less as it’s vasty over priced - that’s pure opportunity cost on the part of the seller. Anyone buying it at the listed price is either rich, stupid, or both...

[epsilonGreedy]

11 hours ago, Jenjen said:

The plot of land is in a good location in the middle of town in central Scotland, it’s very difficult to find land near me and this is fairly reasonable compared to a few other plots that have been up for sale over the past few years. I didn’t realize there was any form of official ratio but know this is the sort of price we will have to pay for land in our area (if not more).

 

 

There is no official ratio but there are proven rational market forces. These forces dictate that the sensible price for a plot is:

 

Estimated Final Market Value - ( Build Cost + Pro Builder's Profit).

 

Houses are more expensive to build down south in the UK due to higher labour costs but final market values vary by a greater amount than these regional labour costs. Hence in SE property hot spots a plot might be 50% of final value but much lower on the Isle of Sky.

 

It seems a shame of a little odd to me that with a starting personal equity of £220k and a keenly priced semi serviced plot of £95K you are planning on a £230k mortgage at the self build starting line. There is ooddles of evidence here that you will end up with a £300k mortgage. I believe your opening self build plan needs adjustment.

 

How large a house by square footage do you require?

Edited August 7, 2018 by epsilonGreedy

[epsilonGreedy]

2 minutes ago, PeterW said:

Based on what logic as that’s a pretty bold statement ..?!

 

 

There is nothing bold about stating a broadly accepted truism that has been demonsted for decades.

 

https://www.homebuilding.co.uk/how-much-does-the-average-self-build-cost

 

6 minutes ago, PeterW said:

Commercial land banking is even lower - local land price where a developer bought land on the edge of the local village has returned a plot price of £40k plus servicing on a small estate where the houses start at £295k and go to £425k. That’s between 9.5% and 15%. As I said though, the rule of thirds used to be right but that’s long gone now in commercial development. 

 

 

Citing figures from land bank speculators or large estate developments is completely irrelevant to this discussion.

[newhome]

5 minutes ago, epsilonGreedy said:

It seems a shame of a little odd to me that with a starting personal equity of £220k and a keenly priced semi serviced plot of £95K you are planning on a £230k mortgage at the self build starting line. There is ooddles of evidence here that you will end up with a £300k mortgage. I believe your opening self build plan need adjustment.

 

It doesn't sound like the OP has got as far as costings yet so there has been little planning done at all apart from possibly working out the top limit of what they can afford. It's no more than that just now, a maximum budget. It doesn't mean that's what the yet to be decided budget will be set at so let us wait until the OP has started some more detailed costings before telling them their plan needs adjusting. 

 

[PeterW]

16 minutes ago, epsilonGreedy said:

 There is nothing bold about stating a broadly accepted truism that has been demonsted for decades.

 

https://www.homebuilding.co.uk/how-much-does-the-average-self-build-cost

 

I take it you read the link (sorry to OP taking this off topic)

 

The Results (for a Typical Self Build Home):

• the median build spend was £270,000 
• the median plot cost was £190,000 
• the median market value of home £500,000

 

By my maths that makes the median land 38%, build 54% and profit (or equity) 8%...

 

Not sure you’d find many developers taking that level of return - most of that would be swallowed in repayments on finance. 

 

For comparison - 2 recent projects I have been involved with have been in the 25/50/25% split or slightly higher on build as materials have gone up. 17% overall on a main contractor is about the lowest I’ve seen anyone go. 

 

If the OP can comfortably get a serviced plot for £100k, spend £350k on the build and come out at £450k on top then happy days. 

 

@Jenjen out of interest what is the gross internal floor area of the house that has PP on the plot ..?? As a raw starting point, multiply that by £1500 and it’s a decent budget figure to move from. Your current budget should buy you 200 square metres with change depending on how much you do yourself. The more you do yourself the bigger you can go or the less you will spend for the same floor space. 

[Thedreamer]

29 minutes ago, epsilonGreedy said:

 

There is no official ratio but there are proven rational market forces. These forces dictate that the sensible price for a plot is:

 

Estimated Final Market Value - ( Build Cost + Pro Builder's Profit).

 

Houses are more expensive to build down south in the UK due to higher labour costs but final market values vary by a greater amount than these regional labour costs. Hence in SE property hot spots a plot might be 50% of final value but much lower on the Isle of Sky.

 

It seems a shame of a little odd to me that with a starting personal equity of £220k and a keenly priced semi serviced plot of £95K you are planning on a £230k mortgage at the self build starting line. There is ooddles of evidence here that you will end up with a £300k mortgage. I believe your opening self build plan need adjustment.

 

How large a house by square footage do you need?

 

Skye is probably not the best example, property and land are increasing very quickly here.

 

I think that formula works if you are Pro builder with a view to a profit, but probably a proportion of self-builders aren't too bothered if the value is less than expected at the end. Obviously, if a property is valued higher you might benefit from a  lower interest rate for borrowings, but for me, I can't ever see us moving so the final market value is not really relevant. 

 

 

[ProDave]

10 hours ago, epsilonGreedy said:

 

Two points:

1. Scottish plot values are noticeably lower than UK averages.
2. You have previously told us about the complex story behind your plot purchase Had you completed your self build within 2 years of plot purchase I assume your plot cost to final value would have been closer to 30%

If our old house had sold quicker, I would have had more money, so paid more people to work on the new house, so the total cost of the new house would probably have been £250K making the plot value only 20% of the total. And it would then be very questionable whether the new house would actually be worth what it cost.

 

The main result of the delayed sale is me doing very much more of the work than I ever expected so the overall cost reducing a lot, plus I probably strive more to get a good deal on everything we buy to eek out a stupidly small budget to go further.

[epsilonGreedy]

9 hours ago, newhome said:

 

It doesn't sound like the OP has got as far as costings yet so there has been little planning done at all apart from possibly working out the top limit of what they can afford. It's no more than that just now, a maximum budget. It doesn't mean that's what the yet to be decided budget will be set at so let us wait until the OP has started some more detailed costings before telling them their plan needs adjusting. 

 

 

I feel it is reckless to offer encouragement to the OP given the plan outlined so far.

 

The OP has a mortgage free home and a nice wadge of cash in the bank and now seems to be planning to dispose of that home to fund a selfbuild with no notion of likely final market value, no idea of build cost and will end up with a large mortgage. I am surprised I am the only contributor to this thread who has said, whoa.

 

All this rose tinted rhetoric about it not mattering if this is "your forever house" is the language of rich boomer generation retirees. If this forum is to survive in the long term it needs to provide useful advice to the next generation of self builders.

[ProDave]

1 minute ago, epsilonGreedy said:

 

I feel it is reckless to offer encouragement to the OP given the plan outlined so far.

 

The OP has a mortgage free home and a nice wadge of cash in the bank and now seems to be planning to dispose of that home to fund a selfbuild with no notion of likely final market value, no idea of build cost and will end up with a large mortgage. I am surprised I am the only contributor to this thread who has said, whoa.

 

All this rose tinted rhetoric about it not mattering if this is "your forever house" is the language of rich boomer generation retirees. If this forum is to survive in the long term it needs to provide useful advice to the next generation of self builders.

I would add caution as well.  If I had known 100% what our situation would be, I might have just stayed in the old house and improved it instead.

 

BUT when the dust settles, we will be in a much better house, only slightly smaller than the old one (downsizing was the original aim) and we will be a little better financially than we started, but not a lot.

[epsilonGreedy]

8 hours ago, PeterW said:

 

I take it you read the link (sorry to OP taking this off topic)

 

The Results (for a Typical Self Build Home):

• the median build spend was £270,000 
• the median plot cost was £190,000 
• the median market value of home £500,000

 

By my maths that makes the median land 38%, build 54% and profit (or equity) 8%...

 

Not sure you’d find many developers taking that level of return - most of that would be swallowed in repayments on finance. 

 

 

Self builders are not professional developers, so I am not sure what point you are trying to make.

 

The self build financial survey I linked to supports my claim of typical plot value ratios and contradicts your claims in this thread.