Finance for a build-to-let

THE QUESTION

We have quite a big garden and have managed to get planning permission for both an extension to rear of our property and also a new dwelling to the side of the property.  Ideally, we’d like to do both at the same time.

The plan is for it to be a build-to-let.  We have been looking for a lender that would give us a mortgage that would give us enough to at least build the new dwelling, at the moment we’ve only been able to find mortgages that would allow us to extend the property but won’t cover the new build.

I wonder if a self-build mortgage would be our best option or if there are other financing options we could look at.

THE ANSWER

You need a radical re-think here, as you are barking up several wrong trees -

1. If you plan to build next door to let it out, you can stop wasting your time thinking about self-build mortgages.  Not only is it not your best option, it’s not any option, it’s a complete non-starter.  These lenders are hotter than hot on not lending to ANYONE who is not building it for their future home to live in. You can try and blag that you are, but they will cut off funding at any point during the build when they suspect you don’t plan to live in it yourself – suspicion, not proof, is sufficient for them to cut you adrift – and their surveyor will be reporting back at regular intervals as they keep an eye on progress.
2. Likewise, any other type of mortgage - they don’t exist for what you want to do.  No mortgage lender funds new builds.
3. Your current mortgage lender will never give permission to build the new house next door as long as they have a charge over the property.  Even if you could fund the build yourself, they could call in the mortgage at short notice as soon as they sussed what you are doing.

There is only one type of finance to fund new builds - development finance - end of.

You cannot access development finance until you are at the point of being ready to build, with full planning permission in place and with the land to build on sitting on its own title.

How you need to proceed

Step 1. apply for planning permission. Apart from the application cost, there is no downside.

If you don't get planning, you are in the same position as you are now.  If you get it, the value of your property will have increased sharply.

Step 2. Apply to your current mortgage lender for permission to split the title. You will need to pay for their valuer to come out and value the property minus the new building plot.

Unless the reduced value pushes your mortgage borrowing above your loan product ceiling, their permission should be forthcoming, and you can split the title.  If it does exceed your borrowing loan to value (LTV), you will be required to pay your lender a sufficient cash sum to reduce borrowing back down to your product loan to value before they will grant permission to split the title.

e.g. if the reduced value takes your borrowing to 80% and you have a 75% LTV product

Step 3. Choose your builder who will build it for you.

Step 4. Apply for development finance from one of the specific development finance lenders. They will fund 100% of the build cost and your deposit is the unencumbered building plot you have created.

Step 5. Once the build is complete, you can refinance to a BTL mortgage to repay the development finance lender

We have brokered a number of projects exactly like this.

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