Guest Blog: Four Costly Financing Mistakes and How to Avoid Them
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
1: Don’t just look at the interest rate
There’s a lot more to a development loan than just the interest rate. Because you only pay interest on the monies drawn and development loans are delivered in instalments, it makes more sense to look at the total cost of borrowing over the term of the loan and build, as more flexible instalment options may trump a low interest rate with all the loan monies delivered on day one.
If you only need the money for a short period, focusing on the arrangement fees may be more fundamental than the interest rate. If you’re building an extension and it’s going to take three months, a 1% arrangement fee might add more to your overall cost of borrowing than a higher interest rate, as you’re only borrowing for a short period.
On the flipside, if you’re doing a new build that’s going to take 18 months, you want to make sure the lender involved is going to be the most cost effective over that period, so you may be better off choosing a lower interest rate with higher arrangement fees.
2: Don’t try and lowball the loan term
In a normal mortgage, it makes sense to try and pay off the finance in as short a time as possible to reduce the cost of the interest. If you were to do the same for a development loan, however, it may end up costing you more.
Even the most well managed construction project can be unpredictable, with everything from weather conditions to late material deliveries delaying progress on the build. If you underestimate the time it will take for the build to complete and don’t include a buffer period for contingency, you run a high risk of having to extend the loan, with all the costly fees that would include. Development lenders have been known to charge fresh arrangement fees and increase the applicable interest rate when extending the lending term.
Lenders would much rather you borrow for a period that safely provides enough time for you to complete the development, and very rarely will this be more expensive than if you underestimate the development time so that you can shave off a bit on the interest.
3: Don’t assume that bigger is better
Big banks and specialist development lenders may be most prominent in the market, but that doesn’t mean they’re the best option for you. There are many plenty of smaller building societies – many of which can only be found through mortgage brokers – who are more flexible and understanding while charging far less for administration.
For example, if you were to borrow £100,000 every month to cover the cost of your build, the lender will send a property valuer or a quantity surveyor to the site to make sure the agreed milestones have been hit before they release the next instalment. The surveyors that big banks and specialist lenders send charge a lot for their time, while building societies tend to use local surveyors at a fraction of the cost, saving you money on the total cost of borrowing.
4: Don’t leave your financial arrangements too late
If you want to get the most competitive finance solution, approach a broker or lender well in advance of your build starting. While a normal mortgage application might take a month, you should expect a development loan application – which is a far more complicated process – to take three months or more. Being guided through this process as efficiently as possible is one of the many benefits to using a mortgage broker.
What you don’t want is to spend money on architect fees and planning applications, only to find that you can’t secure the finance that you need, or complete a beautiful house but find that the expensive financing that you took out makes it impossible for you to refinance it with a lender offering competitive, high street rates.
You should be making financial arrangements in tandem with your initial conversations with your architect. Being confident about the amount of money you’ll have available and the frequency at which it will be delivered will make it far easier for you, your architect and your contractors to plan ahead. You may discover it’s better for you to split your project into two smaller developments that are easier for you to secure finance for, or you may even find you can secure more finance than you expected.
If you have any more questions about financing your self build, feel free to get in touch by emailing me at [email protected] or by calling 0207 317 2820 .