Have you ever dreamed of building your own house but lacked the finances? The good news is that your dream could become a reality thanks to the new government incentive, Help to Build. Help to Build allows you to take out an equity loan to contribute to your own self-build house. Similar to the Help to Buy Scheme, the Help to Build Scheme allows the borrower to complete a custom or self build property with a 5 per cent deposit, with 20 per cent being provided by Homes England as an equity loan (40 per cent for London) and the balance of 75 per cent being funded via a custom or self-build mortgage.
The scheme is currently available only to people aged over 18 who have a right to live in England. You have to make the newly built house your only house and you must secure a mortgage from a lender registered with the Help to Build Scheme.
There are also different types of builds that are covered by the scheme.
🏘 Custom build, which means you work with a professional homebuilder who organises and manages the entire build for the project.
🏘 Self build, which means you handle every stage of the project, so you are responsible for buying the land, purchasing building materials and hiring contractors.
🏘 Shell build, which means a professional will be in charge of the structure of the house and you take responsibility for the internal layout and walls.
What are the key things know about the Help to Build scheme?
🏘 To meet the basic eligibility you will need at least a 5 per cent deposit (for a standard self build mortgage you would need a deposit between 20 per cent – 25 per cent)
🏘 Help to Build is not a discount on the price of the house, so all the costs for the build are the same with or without the Help to Build loan.
🏘 The Equity Loan does incur interest payments for the first five years: interest is charged from year six onwards.
🏘 Importantly, you need to be aware that the amount you pay back at redemption is based on the current market value of the house and not the amount you originally borrowed.
🏘 The equity loan must be repaid at the end of the term (usually 25 years), when you sell your home, pay off the mortgage or, if you have the funds, you can repay the equity loan at any time.
🏘 A £1 monthly management fee is payable for the life of the equity loan.
So how does it all work?
You will be offered an equity loan based on the estimated cost to buy the land and build the house. You should also know most mortgage lenders will want to see planning permission for the land you want to build on as part of their assessment process.
The loan amount can be between 5 per cent and 20 per cent (up to 40 per cent in London) of the total estimated cost.
Once you’ve been confirmed as eligible you can spend up to £600,000 on your new house and this must include the cost of the land. If you have already purchased the land you are limited to £400,000 to complete the build.
Once you have been offered the loan you have a maximum to three years to purchase the land and build your new house.
You will need some of your own funds, at least a 5per cent deposit and a self-build mortgage to pay for the land and build phase.
Your mortgage lender will release funds in stages throughout the build, ensure you understand the phases and any additional costs before more funds can be released. These funds will continue to be released until the house is finished.
So what’s the process during and after build?
During the build
Based on a house costing £400,000 to build, your deposit will be £20,000 (5 per cent) and you will take out a self-build mortgage for £380,000.
After the build
Once the build is complete, Homes England will make the equity loan to the lender, therefore reducing the amount you need as a repayment mortgage. Again, based on a cost of £400,000, your deposit would remain £20,000 (5 per cent), your equity loan £80,000 (20 per cent) and your repayment mortgage £300,000 (75 per cent). If you are based in London you could be eligible for an equity loan of 40 per cent so the overall proposition would look like this: a deposit of £20,000 (5 per cent), an equity loan of £160,000 (40 per cent) and a repayment mortgage of £220,000 (55 per cent).
What are your equity loan fees?
You will have a £1 monthly management fee until the loan is repaid.
You will be charged interest for the lending the funds to build your house; the fee is worked out annually and divided into 12 monthly instalments and collected with a monthly direct debit.
For the first five years you are not charged any interest then, in year six, the interest is charged at 1.75 per cent, and from year seven onwards the interest payments will increase to 2 per cent plus the Consumer Price Index inflation rate.
For further advice and guidance around any of your mortgage needs contact OutNewsGlobal’s mortgage expert at michelle@csfg.co.uk.
