More risks are involved in building your own home but self-build mortgages can help with the financial complications of managing such a project. The main difference between a self-build mortgage and a house purchase mortgage is that with a self-build mortgage, money is released in stages as the build progresses rather than as a single amount.
There are two types of mortgage which could be used. The first option is a traditional arrears-based mortgage released in staged payments on completion of each stage. The second option is an advance payment scheme which releases funds in advance of each stage of construction and removes the need for bridging loans. The stages can be fixed or flexible but there are usually five and these depend on the type of building work. Not many mortgage companies will offer an advanced payment, this is due to the rIf you want to stay in your current home while the new one is built, you will need to find out what the lender's attitude will be to any outstanding mortgage on your existing property. You also, need to ensure that you have enough income to cover both mortgages.
About 20,000 people build their own homes in the UK each year and this number is rising. Over 30 banks and building societies offer mortgages to self-builders. You may be able to get between 25% and 80% of the value of the building plot and between 65% and 95% of the costs of the building.
Working out your budget
You need to plan your budget carefully so that you know how much the project is going to cost in total. The mortgage lender will ask for this and you need to make sure that you have covered all your costs such as land costs, professional fees, building work, materials, etc. Make sure you know what you can take on yourself and employ an architect, surveyor, planning consultant and project manager if necessary.
You are probably going to borrow a large sum which you have to pay back whatever happens to the building. You need to make sure that you hire a good builder in order to reduce the risk.
Getting the right insurance and warranty cover is also vital so that you can be protected against some of the risk if things go wrong. You will also need to cover your legal expenses. It is essential to include an amount for contingency - to cover unexpected costs which might come up.isk involved. * Personal savings: if you have the money in savings and don't need to raise it elsewhere, that's great. But be careful about using your retirement savings to fund a new business. There is always a risk in starting a new business, so make sure to evaluate your alternatives carefully. In fact, unless you have funds over and above what you intend to use as a retirement fund, you should probably raise the money elsewhere.
* Friends and family: if you don't have the money on hand, friends and family are normally the least expensive way to raise funds because they may not charge you interest, they won't require you to submit a business plan, and they're usually the only ones who will fall for your pleas for sympathy. (Try the "I don't have any collateral or business experience but I really need the money" approach on your banker and see if it works. If it does, please send us the name and address of our new banker.)
Equity money: equity money can come in the form of private investments from friends, family, and interested strangers. The interested strangers may be other successful companies that wish to have an interest in your company vs. franchising. And they may bring the same kind of expertise and industry experience to the table.
Credit card loans: raising money by using your credit cards should be your last resort because the interest rates are so high. If you find yourself in a position where this is your only choice, you should probably reevaluate your new business idea. Take a hard look at the reasons why no one is willing to lend you money. But, if you really believe in yourself and in your idea, go for it. You won't be the first person to finance a successful business by using credit card debt.# Bank loans: banks are becoming more willing to make small business loans, provided that you have some collateral (real estate, equipment, marketable securities etc.) and can convince the banker that your business has strong, reliable cash flow from which to make loan payments. The cost of taking out a small business loan will vary from lending institution to lending institution. Call around for the best rates. And ask your friends and acquaintances for their recommendations. One thing that won't change much is the documentation that you'll be expected to provide to them when you apply for a loan. For a complete discussion of the documentation you'll need, see debt financing.
# Government loans/guarantees: for a government loan, you still have to go through a bank, so the paperwork demands are there. Government loans generally require collateral and may change higher fees, but they may permit you to borrow for a longer term. Ask your banker whether you qualify for an SBA loan. For more information about the types of SBA loans that may be available, see our discussion of federal resources.
# Local loans: depending upon where you live, you might be able to get a low-interest loan from your state or community. Some communities have what are called venture loans, which are small loans (usually up to $5,000) that you can get without having any equity. The catch is that they're tied to job creation, so you have to be able to show that you'll be creating new jobs. For more information on these local loans, see state and local government loans.
