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Stage Payments and Self Build Mortgages

Written by Suffolk Building Society

8 Nov 2022

13 min read

Self build mortgages and stage payments: what you need to know

If you’ve ever considered building your own home, or carrying out extensive works to an existing property, you’ll know there’s a lot to think about. And, when it comes to funding your project, the questions keep coming! Some of the most common queries we receive for self build mortgages are all about stage payments, so we’ve put together some useful information which should explain all you need to know.

Plus, for anyone wanting to know more about crafting their dream home, check out our series of self build and renovation blogs for more useful information.

What is a staged payment mortgage?
A staged payment mortgage is for self build projects where the funds are lent in stages, as the build progresses. This means a borrower will only pay or accrue interest on the monies received, and not the total amount from the outset. For the lender this helps to ensure that the money is being spent as planned, and that the borrower has a reduced risk of running out of money halfway through the project.

Do I need a staged payment self build mortgage?
A self build mortgage is typically required if you are building a new home, including knocking down an existing structure and rebuilding, or if you are renovating, converting or extending an existing property.

Where a property is already built a self build mortgage is required where the works being carried out will make the property inhabitable for an extended period of time, such as left without a kitchen and / or bathroom facilities, or any works which alter the structural elements of a property that are essential to its stability, or make the property non-watertight or non-secure.

If you are buying or remortgaging an existing (habitable) property and carrying out light refurbishments, or like-for-like refit such as a new kitchen or replacement windows, you most likely require a standard residential mortgage.

Are there different types of staged payment mortgages?
Yes! Mortgages come in all shapes and sizes, and staged payment mortgages are no different. Some of the options may include different choices for:

  • Loan to value, or LTV, ratios – which affects how much you may be able to borrow.
  • Interest rate types – such as a fixed or variable rate.
  • Repayment types – you may be able to choose between interest only (monthly repayments only cover the interest, not contributing to reducing the overall mortgage balance) or capital & interest (monthly repayments cover the interest due plus a portion of the capital borrowed). Another option may be a combination of these two types, known as part interest only and part capital & interest, often shortened to part and part.

Additionally, with a self build mortgage which offers stage payments, you will need to consider whether the funds will be lent in advance or in arrears. We have covered this topic in more detail below.

Are advance or arrears staged payment mortgages better?
This all depends on the individual circumstances of the borrower and their self build project.

One important thing to consider is if the stage payments are lent in advance or in arrears. The difference here is crucial. The most common method is in arrears, which means the funds are released after the stage has actually been completed – that is, the lender uses the value of the finished work as security for the funds required.

Therefore, if you are taking out a self build mortgage which has stage payments for building work in arrears, you must ensure you have adequate funds to finance the work upfront first.

Advance stage payments are the opposite, where you get the funds before carrying out the work. Whilst this might seem like a no-brainer, in that you need the money to carry out the work itself, this is riskier for the lender as the security for the loan doesn’t actually exist yet. That’s why advance stage payment mortgages are less common and those that are available are typically offered at a higher rate than those where money is released in arrears.

At Suffolk Building Society our self build mortgages are on an arrears payment basis.

Typically, what stages of the build are funds released / how many stages are there?
Some lenders have set stages at which the funds can be released, others, like us at Suffolk Building Society, are happy to be more flexible according to the build plans. For flexible stage payments you will still usually need to supply an outline of the expected stages and amounts required when you apply for a self build mortgage, but this won’t be set in stone!

Stages usually include certain benchmarks of the build such as completion of foundations, the building up to eaves level, when watertight and windows installed, fixtures and plastering.

We do not have a maximum number of stages in which funds can be released.

Can my own architect verify the quality of the build in order to release more funds? If not, who can and who are they appointed by?
No, your architect cannot do this. To release more funds the lender will require their own appointed valuer to visit the build and carry out their assessment. You will need to pay a stage release fee which will cover the cost of this visit.

All stage releases will be subject to this assessment, plus you will need to provide adequate building indemnity insurance cover. An architect’s certificate (or Professional Consultants Certificate) will be required when the project is finished, or you could choose to provide one of the recognised warranties for the build, such as an NHBC warranty.

Do all self build mortgages have some form of staged payment?
Typically yes. At Suffolk Building Society we have a minimum of two stage payments (but no maximum).

Stage payments are more cost effective than having access to the full funds upfront as, with money being released gradually, this means the interest is only accrued on the funds that have been taken and not against the full amount from the outset.

A lender will not advance the total funds against a projected property value, which is yet to be built, as they will not have adequate security for the loan from the outset.

Are staged payments guaranteed?
All stage payments will be subject to the mortgage lender’s checks, such as the instruction of a valuer. This gives the lender reassurance that the build is progressing and the funds are being used as expected.

Are staged payment mortgages based on actual costs of the build or the valuation as the build progresses?
There are two factors to consider here. Firstly, during the mortgage application, the initial approval for the mortgage will be calculated on the amount you wish to borrow and the projected completed value of the property. As part of your application you will need to submit details about the estimated (quoted) costs – along with lots of other information, of course!

Then, during the actual build itself, the amount released will be based on valuations as the build progresses. These valuations need to be provided by a valuer, instructed by the mortgage lender. At each stage release you would be subject to a maximum LTV limit set by your lender. At Suffolk Building Society our maximum LTV is 80%, so at each valuation stage this would be the most you could borrow against the current project value in total.

An example scenario of stage release payments:

  • To start the project you want to borrow money against the land, which our valuer has assessed is worth £150,000. You can borrow up to 80% of its value (£120,000) at this stage.
  • Upon building up to the eaves level you may choose to take another stage payment. The property is now assessed to be worth £250,000, so you can take an additional £80,000 which makes your total borrowing £200,000.
  • Next you have made the building watertight and had windows and doors fitted, with a valuation of £400,000, you could now borrow an additional £120,000, with your borrowed funds totalling £320,000.

Stage Valuation New amount which can be borrowed + Existing borrowing = Total borrowing
Land £150,000 £120,000 £- £120,000
Up to eaves £250,000 £80,000 £120,000 £200,000
Watertight £400,000 £120,000 £200,000 £320,000

Stage Valuation New amount which can be borrowed+ Existing borrowing= Total borrowing
Up to eaves£250,000£80,000£120,000£200,000
Watertight£400,000£120,000£200,000 £320,000

It’s important to remember, when taking stage payments, to include any monies already taken and be aware of the total borrowing amounts. You should also be aware that usually fees apply when taking stage payments which covers the lender’s costs of instructing a new valuation and releasing the additional funds.

Additionally, there is typically an amount retained by the lender for ‘final release’. This amount is usually determined on a case-by-case basis so will depend on your individual application. This last amount is held for security by the lender and released upon submission of certain documents, such as the completion certificate, architect’s certificate and proof of buildings insurance.

Are there restrictions on the types of build (Modern Method of Construction, non standard construction etc) for either type of staged payments?
Self build mortgage providers may have different criteria according to the build type, but this does not specifically affect the stage payment element.

If I can afford to start the build myself, should I, or should I get the mortgage in place first?
This is something you will need to carefully consider. Some people prefer to get the mortgage in place first, should they later run into cashflow difficulty. As some of the mortgage intermediaries explain in our blog post on self build mortgage tips you do need to ensure that any building work you commence with your own money will be approved by a lender at a later date – if the type of building or the quality of the workmanship does not meet their criteria, you may have trouble getting a mortgage.

You should also consider whether your self build mortgage product will offer stage payments made in arrears or in advance. For payments made in arrears, you will need to have the funds in place yourself and the works carried out before the funds are released. This is a significant consideration and should be factored into your plans.

For more information about self build mortgages see our related blogs:

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