Breaking into the property development market is neither cheap nor easy. It requires a great deal of patience, planning, knowledge, and above all else, a reliable source of finance. However, even with every prerequisite fulfilled, it isn’t necessarily a guarantee that a potential purchase will go your way. You might be out bid at auction, uncover hidden problems with a property that make it an unviable purchase, or have the seller simply change their mind. In the property development market, such scenarios are commonplace, even if your target property was the one of your dreams.
Although the property market is notoriously volatile, there is one method you can employ to improve your chances of securing your dream property – self-builds. Unlike other methods of acquiring and developing property, self-build projects put absolute control in the hands of the developer. This allows you to build the home of your dreams, the ideal rental property, the perfect office suite, or anything in between. The only question is, how can you finance such a project?
As self-build projects deviate so much from the standard fare when it comes to property development, a form of finance was created to cater to its unique needs. This form of finance is aptly named self-build finance. In this article, we will discuss this method of funding a project, how it works, and when you might use it. Let’s get started.
What is self-build finance?
Self-build finance, also known as a self-build mortgage, is a form of finance that focuses on helping a developer construct their own property, rather than purchase an existing one. While this might not seem like it would be meaningfully different, the process in which funding is given vastly differs between self-build finance and any other form of property development finance.
The most notable difference is the staged release of borrowed funds. Whereas other forms of property development finance will release a single lump sum to the borrower upon a successful loan application, self-build finance uses a staged model. As property construction is accomplished in a series of carefully-planned stages, funding is similarly released in stages. Each stage will have an estimated cost, including the purchase of materials, cost of labour, legal fees, and other such expenses. Your self-build mortgage lender will fund each stage separately, as a means to mitigate risk and ensure the project remains within its funding constraints. Let’s take a look at the stages of self-build finance in more detail.
Staged funding of self-build finance
As we mentioned, self-build finance funds a project in stages. These stages start from the initial purchase of the land on which the property will be built, and end with the final touches, furnishings, and decorative work. Although this staged approach to funding may be cumbersome for the property developer, it is ultimately quite helpful to both parties. The lender is protected from an overzealous property developer spending too much too fast, as they don’t have access to the full amount of funding the lender intends to provide. Equally, the borrower enjoys a similar protection, in that they cannot afford the project’s scope to grow beyond the limits of their financial constraints. This helps keep the project on track, to the benefit of all involved.
If you intend to use self-build finance to fund the construction of your ideal property, you can expect the funding to be released in the following stages:
Released Funds Breakdown:
- Land purchase – If the borrower does not yet own the land they wish to build the property on, the first stage will involve the purchase of an appropriate plot of land. While the bulk of this stage’s expenses will be on the purchase of the land itself, you will also have to factor in legal fees and permissions. Your plot of land will be subject to some variant of planning laws, meaning you must ensure you obtain planning permission for your project before you start construction. Having the necessary parties assess the land and your planning can be time-consuming and add to the cost, so be sure to account for it.
- Laying of foundations – Once the land is bought and planning permission for your project is obtained, the next step is to lay the foundations. Your lender will loan you the funds required to purchase materials, hire labourers, and obtain any legal permissions that may be necessary during this stage.
Building & Finishing
- Walls and building frame – This stage is when the bulk of the work begins. Your property’s walls will be built, rooms outlined, and the building will generally begin to take shape. This is one of the more expensive stages typically, and often the one that has the largest amount of funding.
- Building “shell” – The fourth stage consists of constructing the “shell” of a building. This includes filling in walls for pre-fab buildings, constructing the roof, and making the property resistant to the elements.
- Utility installation – Once the building has been put together, the next stage is to install the vital utilities. This includes plumbing, electricity, water systems, and so on. At this point, the property will be fit for purpose, whether that be to live in or work in.
- Finishing touches – The sixth and final stage consists of finishing touches. This includes fixing up anything that isn’t quite as it should be, applying paintwork, installing furniture, and so on. After this stage, the property should be ready for sale.
How does applying for self-build finance work?
As we’ve mentioned, self-build finance is a bit different compared to other forms of property development finance. Thankfully, the application process for self-build finance isn’t so unusual. You will go through a fairly typical application process, providing your lending with the relevant information, such as costs, estimated profits, timeframes, and so on. However, as you are obtaining finance for a construction project, an emphasis will be placed on planning. You should prepare thorough plans for your lender, with a view to making them understand exactly what you’re aiming for from this project. You will also need to show what planning permission is required, and what regulations the project will be subject to. Obtaining planning permission prior to your application will play in your favour. If your prospective lender likes your project, they will approve it and start the process.
Wrapping up
Self-build finance is a viable method of raising finance for both property developers and prospective homeowners. You have near absolute control over the construction of a property. Enabling you to create your dream home, ideal workplace, or anything else. However, this control does come at a price. Securing funding can be much more difficult than with other forms of property development finance, as much of your pitch will be speculative. Furthermore, funding will come in stages, forcing your project to progress within carefully guarded limits. As such, you should weigh up whether starting a self-build is the best option for you, or whether you would be better served waiting for a suitable property to enter the market.