If you have the ambition to build your dream home, there’s a lot to consider. While popular TV shows like Grand Designs showcase impressive self-build projects, they often gloss over the complex financial planning, and practical challenges behind the scenes.
Self-build projects are defined as those where someone directly organises the design and construction of their own home. It can also refer to large extension or renovation work that cannot be financed by standard mortgage products. These projects can be delivered in a range of ways, from someone choosing to design and build the house themselves, or more traditionally employing the relevant architects, buildings, tradesmen etc. to complete the build on their behalf.
Cristian Hinzpeter, property finance director at SPF Private Clients, understands the careful preparation and expert guidance needed for a successful self-build journey. Many of his clients choose a self-build project because the result of a bespoke home, designed entirely for their needs and built to their exact specifications, is priceless. But what’s the reality behind these ambitious projects and what do potential self-builders need to know before breaking ground?
Understanding self-build mortgages: How it differs from a standard mortgage
Unlike traditional mortgages, self-build financing follows a stage-by-stage approach. “Most people know how traditional mortgages or financing works but are not so sure of how self-build works. Essentially, you get to borrow what you need, as you need it,” says Cristian.
“While the house you’re building might be worth £1 million when it’s finished, it’s not worth that when you start, and when you begin with you might only need to borrow £200,000 to buy the land. Further down the line you’ll need another lump sum to pay the contractors for the next phase, and so on.”
This staged approach to lending means you receive the funds incrementally as your project progresses, and it’s only when the build is complete do you switch your lending to a more traditional mortgage. It’s why self-build mortgages or financing have similarities to a bridging loan, and we’ll cover that in more detail later.
What are the common pitfalls and challenges of a self-build project
Self-build projects come with their own unique set of challenges and underestimating the costs or poor budget management are common pitfalls.
“Managing the cash flow is crucial, especially since funding is typically released in stages,” says Cristian. “There are many moving parts and people to pay, and if you’re late with a payment to the builders for example, they can simply down tools and walk off site.”
Some people take on the project management themselves, but they often underestimate the time, cost and stress involved. “It’s a huge task that requires expert knowledge,” says Cristian, “And it’s why you can choose to bring in a specialist project manager, particularly useful if it’s a large or more complex project.”
Getting your ducks in a row – what are the pre-planning essentials?
Before embarking on your self-build journey, thorough preparation is essential. “There are many factors to consider with a self-build mortgage,” says Cristian, “And one of the main things is that the term is very likely to not be 25 years, as it is with a typical mortgage.”
A self-build mortgage can be similar to a bridging loan, because you only need the financing for a couple of years while the project is underway, and the funds are released in stages to manage the cashflow of the build. Once the build is complete, owners switch to a standard mortgage.
“We always recommend speaking to an expert for a deep understanding of the financial process from the outset. It’s not just a case of simply going to a high street bank and asking for the money. There are lots of factors to consider, including how often pay outs can be made for contractors, the insurance policies required to comply with regulations, and any potential impact of being ahead or behind on your build schedule. All these can have a far greater impact than the loan’s interest rate on the overall cost of the finance.”
Are there any alternatives to a self-build project?
“A self-build project can be very rewarding but they’re not for the fainthearted – there’s a lot of work involved, and it can be a very stressful process with so many moving parts,” says Cristian.
“Another option for clients is a custom-build project instead, which delivers a home with a high amount of personalisation but without some of the risk and stress associated with a full self-build project.”
Typically, with a custom-build project a builder has land and approved plans for a small number of houses. Clients collaborate with the builder from the outset and can decide on the finish and interior layout of the house but will have limited influence on the overall size and design.
“It’s a good alternative option to a self-build, as these houses are usually designed to a high specification and consider things like eco credentials, which is increasingly important to clients,” says Cristian. “Not only can clients save money on their energy bills, but some builds also generate additional energy that can be sold back to the grid.”
“For example, a builder might sell a custom-build property for £1 million off-plan (where the property is sold before being built), which when finished would be valued at £1.5 million. Compared to the potential risks and finances involved with a full self-build, plus the unlimited price tag, it can be an attractive proposition for clients.”
While self-build projects can be incredibly rewarding, they’re complex undertakings that require careful planning and expert guidance. At SPF Private Clients, we’re committed to helping you navigate the challenges of self-build financing to turn your dream home into a reality. So contact us to speak to one our expert advisers.
