Ask the expert: Self-build property

This week's expert is Guy Nyirenda

BBC News Ask the Expert column gives readers a chance to have their financial questions answered.

Your Money reader Paul Jones would like to know how to raise funds for a self-build property, and to be aware of what other issues he should expect to encounter when applying for a mortgage.

Mortgage expert Guy Nyirenda, an adviser at mortgage broker Cobalt Capital, answers the question.

Guy Nyirenda writes:

With TV schedules jam-packed with programmes about people designing and constructing their dream homes, it is not surprising more and more of us are contemplating self build.

The thought of turning an idea, brick by brick, into a fully-fledged home, often in the location of our choice, can be hugely exciting.

But as well as being creatively fulfilling, self-build can also be extremely cost-effective.

The combined cost of land purchase, building materials and labour will generally be less than buying an equivalent pre-built property, as you do not have to pay the premium that makes up the developer's profits.

In fact, research suggests that self-builds can be worth as much as 30% more than the land and build costs the moment they are put onto the open market.

Funding your dream

For most of us, of course, the opportunity to build our own home will depend on whether we can raise sufficient funds.

Lenders will only offer a mortgage in the first place if they are satisfied with the architect's drawings and any relevant planning permissions

Although equity release from an existing property is one option, easily the most common way to finance a self-build project is to take out a mortgage.

Contrary to popular belief, there are many companies that are happy to lend for self-build.

The big question is whether you can afford to pay two sets of mortgage payments while the new property is being built, and a lender will only offer you a second mortgage if it feels you can.

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If it is possible to secure a second mortgage, this can be helpful in two ways: firstly, existing mortgage payments will often be cheaper than renting if you are forced to sell, and secondly, you only have to move once.

If a second mortgage is not an option, many self-builders have no choice but to sell their existing property, move in with family or friends, or find rented accommodation.

Some people even choose to buy a caravan and live onsite, although this isn't always practical if you have a family. Mortgage choice

In terms of the specific self-build mortgages on offer, it is usually possible to choose from a selection of fixed and variable rate products and most lenders will offer the exact same interest rates as on their standard mortgages.

Lenders often want the property built within two years

As to how much you can borrow, again the usual rules apply, and this will generally depend on your income - or joint income if applying with someone else - and any other financial commitments you have.

Budding self-builders should be aware, however, that the maximum loan to value on most self build mortgages is 75% (of both land and costs) rather than the 95% that is widely available with conventional mortgages.

In other words, the borrower often has to stump up a fairly sizeable deposit.

But possibly the biggest difference between self-build mortgages and conventional residential loans is the way in which the loan is transferred to the borrower.

With traditional self-build mortgages, most lenders will release funds in four or five blocks as the build progresses rather than as a single amount in advance.

These so-called "arrears stage payments" are only made once each build work section has been completed and the lender is happy with the findings of an interim stage inspection, and valuation, by a surveyor.

Although the lender will only charge interest on the amount of money that has been released, this clearly places big financial demands on the self-builder, who, as well as putting down a bigger than average deposit, also has to have sufficient funds in place to pay for the different stages of the build work.

And although most building firms will only invoice for labour after the completion of individual stages, materials can still be very costly.

Fresh approach

Fortunately, there is a small, but growing number of providers that will lend up to 95% of the cost of the property, and which will even provide the funds for materials and labour at the beginning of each stage rather than at the end (known as "advance stage payments").

In recent years there has been a clear trend towards higher multiples, in some cases as much as 7.5 times annual salary How much you are allowed to borrow

This is achieved by the lender arranging an insurance policy to cover any losses that could be incurred by lending a sum of money above the value of the property being built.

Because this means borrowers do not have to provide a big deposit, many can often remain in their existing home while the new property is being built.

The fact that build stages are paid for in advance also means they can avoid any cash flow problems, a big bugbear of the self-builder.

Sensible planning

Lenders will only offer a mortgage in the first place if they are satisfied with the architect's drawings and any relevant planning permissions, and believe that the timescales and budgets are realistic (many lenders will require that you finish the project within a specified time, often 24 months).

Some lenders may insist on an architect-assisted construction and most will require that the builders are suitably insured themselves to cover any issues that may arise before, during and after construction.

If you can show enough expertise, some lenders will even consider allowing you yourself to oversee the project, as long as an architect, or National House Building Council (NHBC) inspector, confirms each stage has been completed to their satisfaction.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.