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Self-build mortgage cases: five factors for success – Grimshaw

by: Charlotte Grimshaw, head of intermediary relations and mortgage sales at Suffolk Building Society.
  • 13/03/2024
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Self-build mortgage cases: five factors for success – Grimshaw
Every individual self-build mortgage application has its own complexities and unique characteristics.

Although this may seem daunting at first, self-build business is both hugely satisfying and profitable for the brokers who take the time to get to grips with this niche area of lending. 

There are five key aspects brokers should bear in mind when helping their clients apply for self-build mortgages: 

 

Stage payments 

One of the biggest ways brokers can add value is by ensuring their clients are aware that self-build mortgage funds are released in stages, or tranches, as the build progresses. 

Identifiable stages range from the initial digging of the foundations to the final fix. This means the borrower only pays or accrues interest on the monies received, rather than the total amount from the outset. 

There are two types of stage payments – in arrears or in advance. The first is the most common and sees payments released as each stage of the build is completed. Because the lender uses the value of the finished work as security for the monies needed, borrowers are required to fund each build stage upfront. Advance stage payments, on the other hand, see funds given before each stage of building work. As no security for the loan exists, lenders consider this to be a riskier approach, so brokers should be aware that not all offer this as an option. 

Before further funds are released, lenders will need a certified valuer to approve each completed stage (incurring a small cost to the self-builder each time). 

 

Methods of construction 

It pays for brokers to understand the different types of construction methods available for self-build, as not all are accepted by every lender. Each method can affect the timing and cost of the build.

This is significant, as lenders are most at ease when construction is set to begin shortly after an application has been accepted. Indeed, planning permission is usually locked in as soon as the foundations are started. 

 

Understand the project 

Self-build mortgages are not only for brand-new projects, but can also include partially built properties, conversions, renovations and ‘knockdown and rebuilds’. Brokers must judge when a self-build mortgage is necessary, considering factors such as whether the property is uninhabitable or if any structural alterations will impact its stability.

Clients may be surprised to discover that a major renovation project requires a self-build mortgage rather than a standard residential one. If brokers (and lenders) can align their expectations from the outset, it will minimise complications later on. 

 

Contingency planning 

Self-build projects often encounter unforeseen challenges, from weather delays to complications with the groundwork. Brokers can help support their clients in anticipating and mitigating these risks by ensuring they have sufficient contingency plans in place.

Scrutinising schedules and cash flow will help demonstrate to lenders that a self-build project is financially stable. 

 

Effective communication 

A self-build project usually goes through several iterations before everything is agreed. 

Lenders will be reluctant to release funds without a thorough understanding of an entire project, so brokers have a vital role to play. Establishing clear communication channels to bridge the gap between a client and their bank or building society can streamline the process, so any issues are identified and addressed early on. 

Brokers should embrace any self-build opportunities that come their way, safe in the knowledge that lenders are always on hand to assist and ensure the whole process runs smoothly. 

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