Background
Securing a mortgage has certainly got tougher with government intervention and policy advisers hell bent on capping our individual (and thus collective) exposure. However, general discussions with brokers also indicate that there is plenty of capacity in the market for the right kind of borrower and much choice to consider between lenders and their products. Domestic mortgages are regulated which means that those providing mortgages have to operate within strict codes of conduct. Policy resulting from the Mortgage Market Review (MMR 2014), regulated by the Financial Conduct Authority (FCA) has put the emphasis on affordability rather than earning multiples which becomes highly significant to those building, as opposed to buying, who often have to manage temporary living expenses alongside their building programme service costs.
There are no cast iron rules and no-one is entitled to a mortgage. Instead lenders seek detailed information from each of us on a personal basis and, within the current policy context and once they have all the detail that they require, they then decide if they wish to extend an offer. They each have different specific criteria requirements and different attitudes to risk and exposure. Navigating your way through this criteria minefield is a difficult job and here, the role of the broker comes to the fore. Brokers aren’t really whole-of-market as most will align themselves with a reliable mix of lenders who cover the widest possible range. But they are exposed to as many product options as they can gather and a good broker will have selected their portfolio of products accordingly. This is why their advice is so useful in directing you at the outset to the lender who is most likely to satisfy your financial profile. This massively improves your chances of success and will help you to gather the correct information to present your application correctly. Consequently their advice fee is usually worth every penny!
When it comes to self-build mortgages lenders don’t tend to have separate application forms. Instead the same application form is used but with addendum information required to satisfy the project profile. To understand this addendum information the specialist self-build lender, Buildstore, has helpfully provided some valuable guidance based on their experience refined over many years.
Standard Mortgage Information
You can easily download a mortgage application form and the one I picked from a mainstream lender was 26 pages long! Usually in two parts, the first section seeks to gather all of the pertinent details about you, as applicants; address history, employment, income, savings, debt, credit history, mortgage requirements, etc. Crucially it also includes lengthy sections about your monthly outgoings which tackle all lifestyle activities for work, rest and play.
The second part of a standard form then looks at the property in question including a basic profile about its construction type, indicative age and/or state of refurbishment, tenure type, and land size. However, in every case the lender will rely totally on the instructed valuation from an approved surveyor who will have to visit, inspect and confirm market value.
This second part is where the key variance comes in with a self-build mortgage because the property in question has yet to be built!
Specialist Self-Build Mortgage Information Requirements
Informally this is divided into about eight different sections although if you are working with a broker like Buildstore they may categorise this into a more formal fashion based upon their processes.
- How are you building the house? Every lender will want to know if you are placing the contract with just one main contractor or intending to manage the project yourself by sub-contracting the various elements out. If it is the latter they may want to have further detail about your past experience, skill set, available time and some lenders may only have a natural preference to lend where professional builders are being engaged. Build management has a significant implication on cost and your intentions here should be known at the time of making your application.
- What are you building? Some lenders are less restrictive when it comes to innovation and others have tight protocols over building materials and methodologies. If your natural inclination is to use some of the newer products including SIPS (structurally insulated panels) and ICF (insulated concrete formwork), lighter weight claddings on modular frames, etc., then it’s important to declare this early so that right lender can be approached. Lender appetite to introduce change and embrace innovation can be a slow process and just because you’re convinced about a product doesn’t mean every lender will be.
- Are your costings credible? Lenders will want to be convinced that your cost summary has been calculated responsibly, and rightly so, as this is where a casual approach will often lead to problems. Lenders aren’t going to do this job for you and ultimately you will be taking the risk for project delivery, but no stakeholder will want a project to fail, so strong evidence here is required.
- How will progress be certified? You’re going to have money released in stages based upon the final type of mortgage offered. Stage release protocols vary from lender to lender and dependent on mortgage type but they will all need an independent professional to certify that a stage has been reached. This can either be your architect, if they are supplying an architect’s certificate upon completion, or the structural warranty provider who will be assessing the project throughout the build and providing a structural warranty at the end.
- What is your individual project profile? Based upon the above, how long is your intended programme and how are you proposing to pay your suppliers and (sub) contractors. Your individual financial profile will include some initial cash and some borrowing requirement. Understanding this cash flow as part of the programme will dictate either an arrears mortgage profile or an advanced stage payment requirement. It’s no good applying for arrears if in reality you need advance payments.
- Are there any statutory compliances? This starts with planning and usually there are conditions with any consent some of which have to be met before the project can start. The lender will want to know what these are and that they have been, or are being, discharged on a time responsible basis.
- Additional affordability? Where are you planning to live whilst the build is taking place and how much is it going to cost you? The lender will want to see that appropriate measures have been put in place to cover this properly.
- What are your stage release requirements? How do these dovetail with the typical stages understood by most lenders? These include the completion of your foundations, getting to wall plate level (external walls built but no roof structure yet), wind & watertight, first fix & plastering and then the final fit out stage.
Typical Mortgage Processing Stages
Most lenders will provide a Decision in Principle service (DIP) whereby, for a pretty modest fee, they will process your application prior to a real-live project application in order to indicate the kind of sums that you can borrow. The DIP application will need all of the first part of the application form to be compete as well as key assumptions about the land and build profile to make sense of what you are proposing.
Most folks skip the DIP stage and go straight to application. As can be seen from the above this is a lengthy exercise which demands answers to all of the above which is why most of us need help from an experienced broker to compile it properly. After the application, including the specialist information detailed above has been submitted, the lender will instruct the valuation whilst they process the remaining data. The valuer, from a suitably approved panel, will consider the valuation of the land as it is and then secondly with the completed building on it. It is their skills and assumptions which will provide the final security (valuation) for the lender so that they can calculate their exposure through loan-to-end-value (LTV) and loan-to-building-cost (LTB) ratios.
Only when the lender has processed the above will they then make an offer. The offer is usually open to acceptance by you within a 3-6 month period and you will only complete when you accept their offer and take your first draw down.
Stage releases thereafter will involve a request from you, certification that the stage has been reached and, in the case of an arrears mortgage, a revised valuation to trigger the appropriate tranche.
Summary of Fees
The key fees which are payable include the following;
- a mortgage booking fee which is the lender’s standard mortgage processing fee
- a possible lender product fee as some lenders have different fees for different product types
- a valuation fee which is paid by you to the lender and from the lender to the valuer
- a mortgage broker’s fee for their advice, help and guidance
- a mortgage indemnity fee in the event that you are taking advance stage payments
Panel
Getting the Land!
Some lenders will also lend on the land. However, and unless this is being dealt with as a straight forward secured bank loan, you will have to go through the full process as outlined above. This means that to acquire a building plot it will need to have a current consent, and at least outline consent (OLP) for a typical type of house, and your mortgage application will have to include all of the back-end specialist information detailed above in assumption form. This will lead to a mortgage offer which you will accept with the first draw down being their proportional allocation for the land acquisition. There may then be an allowable pause whilst you secure either detailed planning consent (DPP) or reserved matters. Your assumptions will need to have been robust because you won’t want to change the principle of the mortgage details although if more funds are required, and subject to affordability, some lenders can be persuaded to allow further advances.
Written and published in April 2016
