Self Build Mortgages – What can I borrow, with what deposit?
So I want to build my own house. There’s just one little problem.
I don’t have a huge wad of cash to plonk down on a piece of land and start building with, so I’m going to need a mortgage. And that’s where the questions start.
Luckily after a recent (brief) chat with a Buildstore mortgage advisor I now have a few answers.
How much can I borrow?
So roughly speaking, just like with a standard mortgage, you can borrow 4.5 times your earnings (combined earnings if you’re a couple). But just as with a normal mortgage that amount is then reduced by an ‘affordability test’.
What makes up an affordability test?
The banks look at what they think you can afford to pay during the building of your new house. The factors they take into account are any debt you’re servicing – Credit cards, loans etc – and any rent or mortgage payments you’ll be making during the build process.
So the formula goes like this:
(Income – Debt – Rent/Mortgage) X 4.5
= total borrowing amount.
Total borrowing + a minimum 15% deposit
= the total budget for land and building.
How to borrow more?
So you can see that with the formula above it means that people on an average wage are going to really struggle to borrow a useable amount of money. So what can we use to boost the amount that we can borrow?
Well, given that the 4.5 times multiplier is done after subtracting the debt/rent costs, there’s an opportunity to make a decent impact on the total amount the bank will lend by reducing those ‘affordability costs’. Anything you can take off these affordability costs will be multiplied by 4.5 times. So taking £1200 off the annual cost of the rent for example will give you an extra £4,500 on the mortgage.
If you can wipe out that rental figure all together by living with family or even in a caravan for the duration of the build you could see a substantial boost in possible borrowing.
A couple with a joint income of £50,000 who are renting a house at £800 a month and have a car finance loan of £190 per month.
– £9,600 (Annual rent)
– £2,280 (Annual debt servicing)
So according to the bank, £38,120 is the usable income of this couple, which will be multiplied by 4.5, giving a total maximum mortgage amount of £171,540.
The couple would need a deposit of at least 15%, which equals £30,000.
So a total budget of £201,540, for the land and build.
About that deposit…
So if, like me, you’re operating on a pretty tight budget you’re probably asking the same question that I did after hearing about this formula; Namely, if I’ve got my 15% deposit, when do I get the money?
So most self build mortgages are released in stages, after you’ve done certain stages of the build. This means usually paying for the build stages up front before the bank releases the funds to cover what you’ve just completed. It varies by bank, but roughly these are the stages:
- Land purchase.
- Foundations to damp proof course level
- Load bearing framework plus felt and batten roof
- Roof tiles, brick-skin and glazed
- Services first fixed and dry-lined
The problem is if you’ve only got a small deposit you may run in to a cash flow problem. You might not be able to afford to build the foundations and damp proof course before the bank release the money, leaving you in a catch-22. You can’t afford to build the next stage without the bank’s money, but they won’t release the money until it’s been built!
There are a few banks who will solve this cash flow problem by lending the money in advance of doing the actual work. There are less of these products out there, and the interest rate tends to be a bit higher. A bit of googling will lead to those companies, but a big name is BuildStore.
Hopefully I’ve made sense on what is a tricky subject for those of us who don’t have the up front cash to just dive in. If you have any questions ask in the comments and I’ll do my best to answer. Bear in mind, I’m not a financial advisor.