Self-build finance can provide a way for homeowners to significantly increase the size and value of their property, but it is more involved than arranging a conventional residential mortgage. I recently assisted a successful married couple who wanted to demolish their existing home and rebuild a larger family property on the same site.
Their existing home was valued at approximately £1 million and was subject to a £560,000 mortgage with a high-street lender. The couple planned to move into rented accommodation while the existing property was demolished and rebuilt from scratch.
The new property would provide substantially more living space, including additional bedrooms and reception areas, together with a high-quality specification throughout. Once completed, the couple expected the property to have a gross development value (GDV) of around £2 million.
Rather than arranging a standard residential mortgage, they needed a facility that could accommodate both the existing property and the costs of the construction as the project progressed. The ability to access further funding during the build was particularly important to their plans.
I approached a lender with a specialist self-build offering and was able to structure the finance around both the property's existing value and its anticipated completed value.
The lender agreed to provide funding of up to 75% of the property's existing value at the outset, releasing approximately £750,000. This could be used to repay the existing £560,000 mortgage, with the remaining funds providing the couple with capital to begin the construction project.
Importantly, the lender was also prepared to release additional funds as the build progressed. The eventual facility would be assessed against the anticipated GDV of £2 million, with the lending potentially increasing to 75% of the completed value. This meant the couple could ultimately borrow up to approximately £1.5 million, subject to the lender’s assessment and the progress of the build.
The facility secured at the time was offered at 4.19% with a 2% arrangement fee. Once construction was complete, the couple planned to refinance onto a conventional residential mortgage and remain in the newly built family home.
The case highlights why specialist property development finance can be valuable when a homeowner is undertaking a substantial self-build project. The funding requirements can change considerably throughout construction, making the lender’s approach to staged drawdowns and the completed property particularly important.
For homeowners undertaking a high-value project, a specialist large mortgage may also become relevant when refinancing the completed property, depending on the final value, borrowing requirement and the client’s wider circumstances.
Disclaimer:
This case study is for illustrative purposes only and does not constitute financial, legal, tax or investment advice. Finance is subject to status, underwriting, affordability, property suitability, development viability and lender criteria. Terms, rates, LTVs and availability may vary depending on individual circumstances.
Risk Warning:
Property and other assets used as security may be repossessed if repayments are not maintained. Property values can fall as well as rise. Self-build and property development projects can also be subject to construction delays and cost increases, which may affect the overall financing position.
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Property values can fall as well as rise, and you may not get back the amount originally invested. Property investments can be illiquid and may take time to sell. Where borrowing is used, your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it.
