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Bad Credit Mortgages by Omer Mehmet

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    Building your own home is the perfect way to create the home you’ve always dreamed of. Rather than buying an existing property, you can design your home from scratch to meet your exact specifications and ensure it is built to meet them entirely. When using a mortgage to finance your building venture, a certain type is required that is expressly designed for self-build projects — a self-build mortgage. 

    As self-builds are becoming more popular, so too are self-build mortgages and many lenders offer loans for this purpose up to £1 million. When you need to secure a higher amount than this for your self-build project, private banks provide more flexibility regarding both your financial situation and your project requirements. At Trinity Finance, we have formed good relationships with lenders offering self-build mortgages and can secure the best deal to suit your needs.

    What is a self-build mortgage?

    As you need funds to build your home, a standard residential mortgage just isn’t suitable. That’s because the funds are released when you complete the purchase of your property. With a self-build mortgage, however, the funds are released at various stages throughout your building project. Depending on the lender and the arrangement you agree to, you may receive the funds at the beginning of each construction stage, which ensures you have the means to pay for materials and labour costs as needed. Alternatively, the funds may be released to you after each construction stage is finished. With this option, it’s necessary to have adequate funding to hand, such as access to savings, to undertake the construction work needed for the next stage. You can then claim back the money you’ve spent when the next instalment of mortgage funds is released by the lender.

    The rates

    Self-build mortgages tend to have higher interest rates than standard residential mortgages although some lenders offer special deals. For example, you may be offered an interest-only option while the building works are being carried out. This keeps your outgoings lower throughout the project, which improves your cash flow. Other lenders allow you to switch to a lower interest rate without paying penalty fees when your property reaches a habitable condition.

    Renovations and conversions

    Some lenders allow self-build mortgages to be used for renovation works or property conversions. This is ideal if you want to carry out extensive renovation or conversion works on your existing home and these require more funding than you can obtain via a remortgage.

    The types of self-build mortgages available

    As previously mentioned, lenders vary as to when they release the funds to you. This gives you two types of self-build mortgages to choose from — advance and arrears.

    Advance

    For this option, the lender releases the funds at the start of each construction stage. This provides you with the necessary money to pay for labour costs and materials as they arise. Receiving the funds in advance is more advantageous than being funded in arrears if you don’t have access to other funds, such as being able to release equity from another property or having substantial savings. It also removes the need for taking out short-term funding, such as a bridging loan, and improves your cash flow. Fewer lenders agree to advance funding than funding in arrears and many retain a percentage of your loan amount until you receive the completion certificate for your property.

    Arrears

    With arrears funding, you receive the funds at the end of every construction stage. Before agreeing to this type of self-build mortgage, you need to ensure you have the finances in place to cover all of the necessary building costs until the next mortgage payment is released. A property valuer usually visits the site at the end of each stage to confirm it has been completed. At this point, the lender will release the funds and you can recoup your costs. This is the most common type of self-build mortgage and is generally offered with more competitive rates than advance mortgages.

    The funding stages

    Releasing the funds in stages minimises the risk for the lender. It ensures that you have enough money for each stage of construction and won’t run out of funds before your building project has been completed. Some lenders are willing to provide funds to buy the plot of land whereas others are only prepared to fund the construction aspect of your project. These are the typical stages for funds to be released:

    • Purchasing a plot of land, depending on the lender
    • Completing the foundations
    • Erecting the walls 
    • Ensuring the property is wind and watertight
    • Carrying out plumbing and electrical works as well as the plastering
    • Implementing the final fixes to complete the project

    Your eligibility for a self-build mortgage

    You don’t need to be a builder or have any knowledge of the processes involved with house-building to benefit from a self-build mortgage. Instead, you can employ the services of an architect, a surveyor and a team of builders to carry out the project on your behalf. You may also prefer to hire a site manager to oversee the project. If you’re a first-time buyer, you can apply for a self-build mortgage as long as you meet the relevant lending criteria.

    The purpose of a self-build mortgage is only to fund the construction of a property you intend to use as your home. In order to finance the building of a property you wish to sell for profit upon completion, you need to apply for development finance instead.

    It’s crucial that your building project satisfies the lender’s criteria. As each lender is different, it’s recommended to check the stipulations with one of our qualified mortgage brokers before applying for your loan. Located throughout Kent, London and Edinburgh, our mortgage specialists know the varying criteria between the lenders offering self-build mortgages and can ensure your building project meets the necessary specifications. Give us a call on 01322 907 000 to run through the eligibility details or get in touch by email at info@trinityfinance.co.uk or via our contact form and we will reply to you with more information as quickly as possible.

    How much can you borrow?

    As with any mortgage, you need to satisfy the lender’s affordability checks. The amount you can borrow is calculated on your income and expenditure, taking your credit rating and any outstanding debts into account as well. Generally, lenders are prepared to offer self-build mortgages with a 75% loan-to-value (LTV) ratio. This means you need to pay a deposit of 25% of the building project’s value. 

    Specialist lenders and private banks offer more flexibility with their lending criteria. You may be able to secure a higher LTV and benefit from affordability calculations based on your overall wealth. This can include a unique income structure, such as bonuses and commissions, as well as your assets. If you don’t have a deposit, some lenders offer 100% LTV self-build mortgages but you need to provide some form of security. This is usually the plot of land that you are expected to already own. 

    The documentation required

    The lender will request detailed information about your building project, including cost projections, schedules, a risk assessment and a contingency plan. You also need to provide:

    • Proof of the planning permission 
    • Drawings and specifications concerning the construction works
    • The building regulations approval
    • A structural warranty and the site insurance
    • Details of the architect’s professional indemnity cover

    As well as this information, you need to show the lender that you can afford to live elsewhere, such as in rented accommodation, while your building project is in progress.   

    Issues to consider

    The construction method

    Some lenders stipulate the type of construction materials you can use, such as masonry or timber frame. Restrictions are more likely to apply to the outer skin of the building, with the material not only needing to be aesthetically pleasing but durable and long-lasting. The lender needs to ensure the property retains its value or preferably increases in value throughout your mortgage term and can be sold if need be. For example, timber cladding has a short life expectancy compared with masonry so some lenders won’t agree to it at all. Others will restrict how much timber is used and some lenders won’t have any issues with the use of timber.

    A contingency fund

    Unexpected issues can always crop up during a building project and you may experience these despite your best efforts during the planning stage. The work may cost more than you estimated, for example, or you may be faced with unavoidable delays. 

    As an example, you may need more funding than you thought necessary for a particular construction stage. In this case, you may decide to approach the lender to request an earlier release of some funds but this will leave you with less money for the outstanding construction stages. Alternatively, you can use a bridging loan to cover the costs. If you know you’re going to run out of money for your project, you can approach the lender for a top-up on the mortgage. This involves a further mortgage application plus all of the related paperwork. It can be expensive and time-consuming, not to mention that your building project will have to stop if you run out of funds.

    To avoid these complications, we recommend that you have a contingency fund in place. If you can allow for about 15% of the project costs as your contingency fund, this helps you deal with any unforeseen circumstances that may otherwise stop your project from continuing.

    Can you benefit from a better deal when the building work is finished?

    Once your project has been completed, your building is habitable and a new valuation has been carried out, you can switch to a new mortgage product. Many lenders offer the opportunity to change to a deal with a lower rate when the building works have been completed. Your original deal may also have been on an interest-only basis during the build on the understanding that it can be changed to a repayment mortgage once the building is habitable. If better rates are available elsewhere, you may prefer to remortgage via a different lender but be aware of any early repayment charges you may be liable for.

    The advantages of a self-build mortgage

    There are many benefits to building your own home, not least of which is that you can design it exactly how you want so that you can look forward to living in your dream home. A self-build mortgage provides you with funds to do this in stages to help you keep on track with the construction. It’s an ideal type of funding if you don’t have access to an alternative, such as savings or the option to release equity. 

    The cost of building your bespoke home should be significantly cheaper than the cost of buying a similar property that already exists. Upon completion, your property’s value should be notably higher than the sum you have paid for the plot of land, labour costs and materials.

    With a self-build project, you can also make huge savings on stamp duty as building work is not subject to this charge. As well as that, you’re not liable for stamp duty on the value of your finished property. This charge is only made on the land’s value if it exceeds £125,000.

    Secure a bespoke self-build mortgage for your unique building project

    As you’re building a custom-designed home, your self-build mortgage will be specifically tailored to meet your needs. At Trinity Finance, our mortgage experts are highly experienced at handling this niche product and will ensure you have the right mortgage solution to fit your circumstances and funding requirements. We work closely with lenders offering self-build mortgages and have access to competitive deals that aren’t advertised publicly. 

    When you’re ready to discuss this affordable way to build your dream home, give us a call on 01322 907 000. We can also advise you on the insurance needed for a self-build project as well as alternative funding options that may be better suited to your circumstances, such as remortgaging or obtaining a bridging loan. If it’s out of office hours, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form and we will reply to you with more information as quickly as possible.

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