How to have a calmer self-build mortgage process

Chris Martin

June 6, 2019

Chris Martin (pictured), head of operations and customer service, BuildLoan

The biggest single risk with any self-build is that the self-builder will run out of money part way through.

The call that wrecks your week comes unexpectedly from an apologetic lender on a Wednesday lunchtime. “We’re sorry but none of the £50k stage payment your client has requested can be released as the valuer says it isn’t worth enough. Your client will have to find the money elsewhere”.

You are now only 48 hours from the builders walking off site due to not being paid, and your self-build client’s project and wealth being damaged, if not ruined.

The way most self-build mortgages work is that monies are released in stages, as and when they are required, based on a schedule theoretically agreed at the outset. What many people don’t realise though is that many lenders will obtain a valuation of the part-built site when a request for a further tranche of funds is made. The decision as to whether to release the “agreed” funds rests on the outcome of that valuation. The tranches are rather less set in stone than the borrower probably imagines.

It is far more common than you might imagine that when the valuation report is received the value of the property in its current state is confirmed as less than anticipated. This then means that the borrowers find themselves unable to access all the money that they need, and they run out of money. They will inevitably blame everyone including their broker, the professional that they trusted. Reduced stage payments can cause chaos and a lot of bad-feeling.

BuildLoan has a solution which takes this worry away.

At BuildLoan our long experience in this sector leads us to believe that there are only two points in a build project where the market value can be accurately assessed. Firstly, it is relatively simple to value the plot before works commence. A valuer who knows the size and location of the plot and is provided with details of the planning permission should be able to provide a meaningful plot valuation.

Secondly, it should be reasonably straightforward to value the completed property, as this then is a known quantity which can be compared to other existing properties. It should be possible to ascertain this value at the start of the process as well as at the end if a detailed specification is provided to the valuer.

At all points in between, there is always a substantial question mark over value. In even the strongest housing market demand for a partially built site is going to be difficult to assess. Who would buy the site if the borrower defaulted? Is there a ready market? In a more difficult market lenders often draw back from higher risk projects so would-be purchasers might be unable to access funding to complete the build.

So, there are many potential challenges with establishing the market value and these can lead to valuers failing to confirm the expected valuation during the build. Where this happens, the lender will very likely reduce the amount available for the next stage payment.

Nobody gains by operating a process which is guaranteed to create stress at regular intervals, and BuildLoan has created a game-changing solution.

The BuildLoan process now involves utilising a cost-based approach to deciding the amount to be released and we have agreed this with our lender partners. Costings are provided by the borrowers at the outset and are assessed by BuildLoan for viability. Assuming they are accepted, all future stage payments are calculated based on the expected costs of each stage rather than market value.

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