Best way to finance self build with advanced payments

[Emma Hunt]

Hi,

Last year we purchased land with a house on for £400k and got planning permission to demolish the house and build a new one.

 

we are having problems getting finance for the build as we have a 400k mortgage on the current land and need to borrow another £230k to build the house. The build cost will be 400k but we have 170k in savings.

 

As we already have the 400k owing on the land mortgage BuildStore won’t help us due to the high initial advanced payment.

 

End value of the house is expected to be £1.2m and we earn enough to have a mortgage of £630k.

 

Any ideas on where we could go with this?

 

Is it possible that I could take the £400k for the land on my own and my partner get a separate mortgage for the self build.

 

Struggling with BuildStore at the moment but limited with what other options we have available to us as ultimately we are £230k short of cash?

 

Any help would be great fully received as currently it looks like we may need to give up our dream & sell the land!

 

thanks

 

Emma

[lizzie]

Hello and welcome.......first  thought what about budget over run/contingency have you factored that in to your costings.

 

Essentially from what you say if i read it correctly it looks as though you have what amounts to a 400k£ building plot fully mortgaged and want to borrow to build with little or no equity in the plot and a relatively small amount of savings against the overall cost.

 

Your savings of 170k seem to be approx 20% of your overall costings 400 plot 400 build......from your final value figure it looks like the third/third/third ratio which has recently been debated on this forum. If you were buying a ready built property for 800k and put your 20% down that would get you back to your affordability of 630k but building loans dont work that way.....nor sadly does the now mythical third profit ratio.

 

It appears from what you say you  have a plot with possibly little equity so not much security for the lender to advance funds against to build. In the majority of cases  the plot is purchased outright and a mortgage taken for the build so that could be why Buildstore wont help you. If you have a decent amount of equity in the plot then that may help. Have you spoken to the people you have your current mortgage with (they will need to give permision for you to demolish their asset) or your bank......or a good broker with expertise in this area?

 

Apologies if I have misunderstood your scenario and good luck.

[Emma Hunt]

Thanks for your response Lizzie, the plot was purchased for 450k so would have 50k equity in it.

 

The lender on the current house / land doesn’t offer self build so we would need to switch lenders.

 

Seems like we are a little up against it at the mo.

 

struggling to find financial advisors that understand self builders but will have another look at that.

 

we have built contingency into our budget so hopefully that’s covered.

 

Emma

Edited March 19, 2019 by Emma Hunt
Missed some of the response

[Alex C]

You would normally need to own either all of or a large chunk of the land to get a lender to lend for a build. Most lenders will not lend for the land purchase, only for the build. Are you also sure about the final property value. 400k build cost dosnt sound much for a 1.2 million house. I don't know where you are in the country but in most areas where people can pay 1.2 for a house there is no way a decent plot with house would sell for 400k.

[Emma Hunt]

We are in Oxfordshire, building in a conservation area & AONB.

 

I think the area, view and that it won’t have any surrounding buildings has helped with end value. The plans have been valued by a friend that’s an estate agent & knows the area well so hopefully it’s pretty accurate.

 

Appreciate the norm is that you own the land out right, had hoped that there may be other options but looks to be thin on the ground.

[Jeremy Harris]

Just looking at the numbers with the sort of margins that developers might work on, I'd say that either the build cost estimate is low, or the completed value estimate is high.  A developer might be able to build with a 20% margin, although for a one-off that's more likely to be around 15%, as there won't be any economy of scale.  Working back from a completed value of £1.2M, and using an optimistic 20% margin, gives a cost for the build and land at around £960k.  Using a more realistic 15% margin gives a cost for the build and land of around £1.02M.

 

Self-builders rarely manage to build much below the costs that a developer might manage, unless they do a lot of work themselves (and that's a double edged sword, as it will take longer and therefore interest on any borrowed funds may be greater).  I would suggest that, if the build is reasonably typical, then with the land having cost £400k, plus the demolition cost for the existing house, then the build cost is likely to be around £600k to £650k.  Even then that may be a bit tight, TBH.  Our plot was fairly cheap, because of high site prep costs, and I did all the plumbing, ventilation installation, some of the wiring, all the internal joinery, kitchen fitting etc myself (to save money) and we still only came in at about 10% under the market value of the completed house.

[Alex C]

I totally agree with @JSHarris on this. There is no such thing as a bargain plot as there are so many self builders and developers queueing up to buy them. I would suggest getting an accurate price for the build you have had drawn up. As far as a lender is concerned saying that it wont cost much as you are doing the work yourself wont cut it. A friend just built 2 houses and had to use a private equity firm to borrow from as no-one else was interested. They were forced to use an approved builder and kept on a very short leash by the lender and had to pay for a quantity surveyor for the lender.

[PeterW]

Agree with what has been said so far. A £1.2m house in Oxfordshire is going to need some high end finish - at high end prices. You don’t get £1.2 value from a £2,000 B&Q kitchen so I would start with a serious question about budgets. If there is a house where you are now and the plot with house is only worth £450k, then doubling will need a serious budget. I’d expect you’re in the £650-700k build budget to get anything like that back. 

 

Sorry.....

 

Can you do a rethink on the design ..??

[Declan52]

Do you have to demolish the house to  build the new one, as in do they over lap on the  site??

If they don't overlap then you could you use your savings to get the  structure up. £170k should put up most buildings,  if not then you might need to  rejig the size to suit. 

Once the  structure is up then you have a more valuable item to mortgage against.  At the minute you just have a plot which is maxed out its value.  By building the  frame you will increase its value hopefully enough to  release enough equity to finish the build. 

If you can get a mortgage company that pays out at certain stages like, sub floor,  wall plate(complete frame if timber frame) roofed,  wind and water tight, first fix, second fix and then finished then once you got approval then you would have money coming in to finance the next stage and so on and so on. Each mortgage company will have their own schedule so you will not only have to find one willing to lend but also whose stage payment schedule suit your build. 

 

And then it's just a shot in the dark so you really need to get a mortgage advisor on board early and see what deals are out there and if these are available to you. 

Or is there any room on the site to keep the house and divide the plot up.  You sell the house and then use this money to finance the build. 

Or as hard as it may be you  sell the plot with the planning permission and bank the money and hope it's enough to start some where else. 

[newhome]

I know it’s not what you planned but is there a way that you can live in the house for a couple of years and see how much you can pay off the mortgage or save? You say that you can afford a £630k mortgage so on that basis you must be up for paying a fairly hefty mortgage payment so can surely stay paying the existing mortgage for a while whilst your repayments are at ‘normal’ interest rates in order to save. Be aware that if you move to a non standard mortgage product the interest rate and thus repayments are likely to be much higher so don’t base affordability on high street mortgage rates. 

 

Are you living there now or elsewhere? If you’re not living there you will be building up a capital gains tax liability from the date of the purchase. 

 

 

[lizzie]

1 hour ago, Emma Hunt said:

Thanks for your response Lizzie, the plot was purchased for 450k so would have 50k equity in it.

 

The lender on the current house / land doesn’t offer self build so we would need to switch lenders.

 

Seems like we are a little up against it at the mo.

 

struggling to find financial advisors that understand self builders but will have another look at that.

 

we have built contingency into our budget so hopefully that’s covered.

 

Emma

I have never tried this broker as didnt have a mortgage for my build but they are at the shows and seem to have a handle on funding for self builds....as I say not a recommendation but just a possibility to try. Good luck.  http://www.pfmassociates.co.uk/mary_riley.html

[Sue B]

How big is the new house - I can’t see the sq m anywhere - just your expected build cost.

[Ferdinand]

One strategy you could do is deliberately plan a project that can be in 2 parts and habitable when the second half has not been built.

 

Eg We have one member .. @Stones ... who has built their house in 2 halves to fit in with a vernacular of long low barns. Click the name and you can find his blog.

 

 

That would lend itself to that approach.

 

There are any number of ways to do or manage that, and it might even be a way you could manage your existing PP, but it is more complicated to manage and you would probably want a year to nail down your process in detail.

 

Ferdinand

Edited March 19, 2019 by Ferdinand

[newhome]

45 minutes ago, Ferdinand said:

One strategy you could do is deliberately plan a project that can be in 2 parts and habitable when the second half has not been built.

 

Given where HMRC are going with refusing VAT claims currently there might need to be some caution with this approach, although that said they can hardly argue that you’re only finishing off if  half the house is yet to be built! 

[Ferdinand]

2 hours ago, newhome said:

 

Given where HMRC are going with refusing VAT claims currently there might need to be some caution with this approach, although that said they can hardly argue that you’re only finishing off if  half the house is yet to be built! 

 

True, but if you need options.

 

On this one you may lose your 25k vat back, but if it lets you build the house then needs must.

 

Or you could do a smaller PP and then another later, but then you lose the VAT on the second half (or is there a VAT reclaim in self build extensions?). But then the 2nd PP might not get through.

 

So you could go for 2 PPs, one for the first, and one for the whole - so you can completion on PP1, and do that VAT reclaim whilst knowing that you can build the rest.

 

Or building the first half may get you a valuation that lets you extend the mortgage further.

 

Complicated stuff, but all kinds of things are possible, and some can work.

 

Or you could rob a bank.

 

F

[newhome]

35 minutes ago, Ferdinand said:

or is there a VAT reclaim in self build extensions?

 

Sadly not. No extensions are VAT reclaimable.