Guest Blog: Never Borrow for a Self Build Without a Broker
Edward Checkley is a mortgage broker at Private Finance, where he’s been helping home builders make their dreams come true for nine years, including many of our clients at DGA. He’s my trusted source for all self build money matters, and he kindly accepted my request to share some of his knowledge with our readers. – John Dyer-Grimes
For a normal house mortgage, you might do perfectly fine walking into a high street bank and making the arrangements yourself. Of course, as a mortgage broker, I’d still always recommend seeking our advice first to get the best deal or gain a second opinion, but plenty of people manage on their own.
The same is not true for development loans. This is a far more complicated type of finance both in terms the complexity of the arrangements and the array of options out there. Every client and every project is different, and finding the ideal lender for each requires searching far outside the well-known names, with many lenders only accessible on a need-to-know basis.
What’s the difference between a normal mortgage and a self build mortgage?
In a normal mortgage, you’re borrowing against an asset that already exists, in this case a house. With a development loan, you’re borrowing against the potential value of the house once the project has been completed.
This means that lenders are taking on a far bigger risk, which translates to higher rates that increase exponentially as the risk increases. A loan for a simple refurbishment or extension might have comparable rates to your high street banks, but if you’re borrowing to knock down a house and build a new one, your total cost of borrowing could double or treble.
A lender’s worst fear is that a build won’t be completed and they’ll be left with a half-finished asset at a fraction of the predicted value, forcing them to complete it themselves. An extension and refurbishment is the least risky for a lender as, even if the project is not completed, there will still be some value added by the works. At the other end of the scale, a demolition and rebuild is most risky, because for the period that the original property is demolished and the new property is not yet build, the asset may actually decrease in value compared with the original acquisition price.
The way developers and lenders meet in the middle is to have the monies provided in instalments. For example, if your project costs £1.2 million in total, a development lender might agree to monthly instalments of £100,000. As a result, lenders for self builds are also very involved with the build, as they need to send property valuers or quantity surveyors to ensure that the build has progressed to the agreed milestones before they release the next instalment in order to protect their asset.
Where does a broker fit in?
First and foremost, we save you money, both in terms of the cost of the finance and by mitigating the risk of something going wrong.
As a borrower, most of the time you get our services effectively for free, as our fee is cancelled out by the reduced fee lenders charge by going through us rather than going directly. On top of that, the rates we arrange with lenders are typically lower than what would be offered if you went to them directly, if you were even able to. Many of the lenders we work with can’t be contacted by the public.
But there’s more to finding the right lender than just rates and fees. The agreements vary dramatically depending on your equity, your employment status, the lender’s attitude to risk, flexibility of loan terms, choice of surveyors and the reputation of your architect and contractors. It’s essential that you find the ideal finance solution that perfectly fits your project, and this may not be something that anyone can accomplish alone.
By working with us, you’ll also have one less thing to worry about. Self builds are stressful enough as they are, so the last thing you want is to deal with lenders, solicitors and their piles of paperwork all on your own.
Click here to read the top four financing mistakes and how to avoid them. If you’d like to get in touch with me, you can email me at Edward.[email protected] or call 0207 317 2820.