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  • Writer's pictureNíall Hedderman

Borrowing To Build A House? - Read This First !

Any homeowner will be familiar with the process of buying a home and most people have a general understanding of mortgages. Building a new house is a different kettle of piranhas however. It is a difficult and prohibitively expensive process, therefore very few people actually build their own home. Just think to yourself; how many people do you know who bought a house? And how many do you know who built one?

Because it is so rare, most people are unaware of what is involved. While I am just an Architect and would always advise someone to seek expert opinion from a financial advisor or a lawyer, there are several issues I have seen my clients confront.

Maximum Budget:

It has been my experience that, regardless of how wealthy the borrower is, the bank will set the upper limit on how much money may be spent on construction of a new house. they do this using a simple calculation, for example;

Cost of site = £100,000

Likely sale value of finished house = £500,000

Maximum construction budget (sale value - site cost) = £400,000

Understand this isn't the amount of money the bank will lend, it's the overall amount of money they will allow to be spent. In total. Regardless of the personal wealth or assets of the client. 

This ensures that if the bank has to repossess the house during construction, they will make back the money required to finish construction when they sell your home.

So if you want to build a multi million pound home, these are your choices; Either buy a site in a very desirable location and borrow to build or pay for the house entirely in cash without borrowing a penny.

Loan to Value:

Even before the recession, at the height of the property bubble, lenders did not throw money at developers and private clients. 75% loans were the norm then and now. The bank will also not lend money to purchase the site, that must be paid for in cash. Neither will the bank lend money to pay professional fees; lawyers, stamp duty, planning application and Architects Fees must all be paid in cash.

The real nightmare scenario happens if property values fall during construction of the house. The bank will re-examine the loan to value ratio, which will have changed; if the value has dropped, so must the amount of loan. But the builder still needs to be paid and the cost of materials and labour wont fall overnight. This means the client must find the money themselves, in order to finish the house.


The Council of Mortgage Lenders is the industry body that represents all lenders in the UK. They take a particular interest in one-off or self build houses. The story goes that in the downturn of the early 1990's many lenders repossessed homes that turned out to be vastly different, and inferior, to what they thought had been built with their money. When these lenders came to sell the repossessed homes, they lost a lot of money on them. It seems that back then, a self builder or wealthy client could self certify their mortgage application for a one-off house. With hindsight, this was an invitation to fraud. 

To prevent this from happening again, the CML have introduced the Professional Consultant Certificate, which is designed to give independent oversight of the project. This is done at the borrowers expense, for the banks benefit. 

The certificate can be signed by a Chartered Surveyor or an Architect. The certifier must have the correct Professional Indemnity Insurance and must agree to keep that insurance for a minimum six years into the future. The certificate is intended to act as a guarantee to the lender that the house is the same as on the approved plans, is built in the correct location and constructed to acceptable standards. It is not a replacement for the NHBC or similar schemes. 

The lender will require an insurance backed warranty before handing over any money for the build. In practice this will be done in stages, following an inspection by the certifier.  

I offer CML certification as a service to my clients, I usually charge around 1% the sale value of the home. This is to cover my increased insurance premiums into the future as well as my time in carrying out inspections. 

If you are have spent years watching Grand Designs and dreaming of building your own place, I am sorry for bursting your bubble. On the other hand, if you think you can deal with all of these issues, get in touch.

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