There are self-build mortgages, but these aren’t available when you’re building a property for sale or rent. These are considered to be commercial developments and are financed in a specific way.
The major banks pulled out when the credit crunch hit, with disastrous consequences for many of their borrowers. They've never really got back into this area of lending again. However, the gap has been filled by small, specifically focused lenders who typically offer this type of finance and nothing else, although a few do offer bridging as well.
In order to deter all but the strongest propositions there are some significant hoops to jump through. These are:
If you don’t fulfil either or both of these requirements you’ll need to get creative about how you can meet them.
This is required up front; the lender will fund 100% of the build cost, in stages, in arrears, but you’ll need to have purchased the land on which you plan to build.
The five stages when cash is released are typically
From the lenders view, ideally you will have sufficient cash to purchase the site, or you already own it, unencumbered. At a push they will fund up to 50% to assist with this part.
You will be expected to fund the first phase, up to DPC level. If you have not already maxed out on the purchase, the lender will release funds to get you to this point. At this point their surveyor (sometimes it is a QS) will visit the site, sign off the quality of your work and recommend the release of the next tranche of cash for you to build out to the next stage. This process of inspect, sign off, release is repeated until the build is complete.
Lenders will keep a keen eye on their exposure to site value at all times and will not deviate from their maximum loan to value (LTV). Typically this will be 55%, but can differ from lender to lender, even project to project with the same lender, but high LTVs are highly unlikely to be approved.
Interest is commonly rolled up and settled at payback of the loan, so there are no monthly payments for you to make during the build.
This can be a problem area for many wishing to get into new build and is a bit of a Catch 22 situation.
Lenders do not allow a 'learn on the job' type of experience. They only lend if you can provide clear, demonstrable proof that you have successfully completed similar new builds. They will require full documentation to show purchase cost, build cost and time, sales and profits. For a single or double unit project, you must show that you have successfully built out a similar project previously. However, that will not be sufficient if you want to build a 10 unit project and only have experience of a single unit build.
If you lack the ability to prove previous relevant experience the solution is to joint venture with someone who has it.
The common thought process here is to use a builder on a specific contract basis, but this is almost universally frowned upon by lenders. They are familiar that this structure can lead to disputes over what was/wasn't part of the contract resulting in delays and cost overruns. This type of approach is unlikely to receive a green light to lend.
Lenders prefer the builder to be an equity partner in the build. They may build out at cost or close to it, but their profit on the project comes from a share of the sale revenues. The common structure for this is termed a Special Purpose Vehicle (SPV); in effect, a limited company formed purely for the project and dissolved once the profits from the project have been distributed to the shareholders.