If you have decided to take the plunge and build your dream home the first thing you need to do is work out how you’re going to pay for it. Financing a self-build isn’t as simple as applying for a regular mortgage. Unless you’re lucky enough to have the capital to be able to pay for it all outright, you will need to apply for a specialist self-build loan.
The biggest difference between a standard mortgage and a self-build one is that, rather than lending you the money in one lump sum (and therefore paying interest on the entire amount right from the beginning of the build), the lender will release funds in stages. This is largely to protect the lender as, if you do default, there will not be a finished property which the lender will be able to seize as compensation so, by lending a bit at a time, they are covered at each stage of the build. Typically, funds are released at each of the five main build milestones – purchase of the land, laying of the foundations, walls up to eaves built, completion of the roof, windows and doors in and the securing of the building, and completion. A valuer will visit the site at the completion of each stage to confirm that it has been completed in accordance with the building contract before advising the lender to release the next set of funds.
The advantage of this type of loan is that you’re only ever paying interest on the amount that has so far been borrowed. However, as most self-build loans release funds upon the end of each stage rather than the beginning, you may find that you struggle to come up with the cash to pay builders or buy materials upfront and it can be a bit of a chicken/egg scenario. Although less common and charging a higher rate of interest, self-build loans that pay out at the beginning of each stage do exist, so shop around if you think you will need this type of mortgage.
Before you apply for a construction mortgage you’ll need to be able to provide the lender with council-approved plans and a building contract. Once they are in place and the loan is approved, if you have also borrowed to purchase the land you are likely to be granted an amount reflecting the value of the land and the build cost rather than the estimated value of the completed home, which should be more. If you need additional funds after the build is completed, for example for landscaping costs, you could arrange for your lender to revalue the property.
It always pays to shop around for any loan as rates and features can vary from lender to lender. Whatever you opt for, be sure that your self-build loan offers as standard interest-only repayments during construction with a choice of repayment options upon completion and the ability to make extra repayments during the build should you wish to.
Emily Buckley is a journalist and copywriter specialising in all things home-related and is currently writing a series of articles in conjunction with Sydney Moving, one of the top removalists in Sydney.
