Self build mortgage

deno120

Hi,

We are looking to purchase a site and build on it over a period of 3-5 years. The following is our financial situation and plan.

Investment property - 2 bed apartment in dublin large and spacious with 2 car park spaces, good location. Outstanding mortgage of 240k, variable rate with KBC bank. Current value of property approx 150 - 170k.
Currently rent this out for 900 per month and mortgage is 1300 per month so we pay the shortfall of 400 per month. Plus maintaince fees of 140 per month so total of 540 we pay to keep this property afloat.

Currently we rent and pay 400 per month rental.

We have 50k in savings

Husband salery is 45k gross. I am self emplyed part time gross salery 20k

We have one child but plan on adding more in the next year or so.

Question is we are looking at buying a site for 40k, We will use our savings for this. Then we have a 5 year plan.

Year 1 - save up for plans and foundation costs for the self build ( we estimate this to be in the region of 20k so we would be saving very hard and making lots of sacrifices but we can do it)

Year 2 - start the build with the money we have saved and continue to save approx 10k this year.

year 3 and 4 - save an additional 10 - 15k per year. So in total we would have saved on average 30k that we can use in the self build. We would then be looking for a mortgage to finish the house of approx 130k.

Does anyone have experience in doing this in stages as outlined above. Will banks look more favourable on this as we will have had strong savings history. Also we would be freeing up an additional 5k from rent we currently pay so this can go towards our mortgage repayments.

We are just concerned that mortgages wont entertain us due to the fact we have negative equity and are looking for a self build.

I would hate to be in a situation in 5years with a site we cant build on due to lack of mortgage. Should we just hold onto our cash and not buy the site but we are both 35 and we want to start building towards a future and we have the area picked out as its close to family and schools so we will be planning on buying in this area whether now or years down the road.

Any advice is greatly appreciated

Thanks

Liam D Ferguson

Get your mortgage approval sorted BEFORE you start any work on the site. Self-build mortgages are always easier to obtain when the lender is involved with the build from the very start. Most lenders won't give a mortgage to complete a part-built house.

• Keep your savings in a separate account where they can be easily identified when you apply for your mortgage. Lenders like to see a savings account with a steady, regular build-up of savings.
• Lender will look for three years' accounts for your business and take an average income from that.

deno120

Thanks for the reply Liam, The problem is we wont get a mortgage at the moment because of the negative equity in our Investment property and we were just keeping our heads above water the last few months but moving forward we will now have additional income ( loan from my business is now finished) so we can afford to save.

We really wanted to buy a site with our savings as we have found one we really want and then save for the build and do the build in different stages.We would see this as a 5 year project and we are happy to rent our current house untill then. We would take it as far as we could by self financing it but then to finish it we would need a mortgage.

Would banks not look favourable on the fact we had purchased the site with no mortgage and also invested nealy 40% of the build total cost so we would seek to get a mortgage for the final 60%.

The site we are looking at is a 6 acre site but we will be building on one acre, the other land has site potential if we were to sell it on but we want to keep it. Could the value of the land be used to help get a mortgage?

Liam D Ferguson

The negative equity alone won't stop you from getting another mortgage. Banks are a lot more interested in your ability to repay, i.e. your income.

Last time I looked at a proposition like this was September 2011 so maybe some of the other brokers here have more up-to-date information, but when I looked then, AIB, ICS and KBC all said they wouldn't give a mortgage for a partially-built house and the only one who would was Permanent TSB and their interest rates were uncompetitive.

deno120

Thanks for the information Liam. we will have to investigate it further and see. Maybe we should hold off and just save so we have a better track record and then approach the banks.

Liam D Ferguson

I keep banging on about this particular point but I can't stress enough the importance of being able to produce a single savings account statement that shows a regular (or increasing) amount going into it each month and nothing coming out. This sort of thing buys you brownie points with potential lenders.

Be careful also to keep your current accounts (business and personal) in good shape. Try not to go overdrawn and if you must, make sure that you're within agreed overdraft limits. Referral fees are a no-no.

deno120

Great advice, We will make sure our accounts are super healthy from now on with a proven track record of savings. We were great up to a year ago but fell behind a little with any savings and we were using our overdraft. Just getting everything back on track now and we have no accounts overdrawn or any other loans so hopefully this will all help us out when making the application.