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Can I get a self-build bridging loan?

Tuesday 25th January 2022 | 4 minute read

Yes it's possible, bridging loans can be used to finance the build of a new home.

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Introduction to self-build bridging loans

Self-build was formerly seen to be a privilege reserved for the wealthy, but thanks to the availability of self-build financing in the UK, be it through self-build bridging loans, self-build mortgages or property development finance, you no longer need a large sum of money to build your own dream home.

There are a few factors however that will affect your ability to borrow money for a self-build.

If you're unsure where to start your research into the world of self-build finance then it's a good idea to begin with the basics and this article will give you a good start.

How are self-builds financed?

Ever aspired to build your own home? Designing and building your own home can be rewarding but they can also be difficult to finance, fraught with headaches and sleepless nights for the inexperienced. Here's a quick overview of your options and depending on your exact circumstances some will better suit your needs than others, and you may even require one or more of these different finance options to realise your project:

• Cash
• Self-build mortgages
• Self-build bridging loans

Here's a summary of each option…

Cash

Even with the cheapest self-build options, you'll still likely need a large sum of cash to finance your build outright. Perhaps you've amassed a war chest of cash reserves over the years, or perhaps you've received a large bequest.

Either way, using your own funds without the need for additional financing means you'll be paying zero interest or fees on borrowing money, therefore it will clearly be the cheapest option to finance your development and maximise profits.

Self-build mortgages

If you've ever purchased a home, chances are you did it with the help of a mortgage. When you buy an existing home, the lender uses it as collateral for the loan if you default on your payments, and you (or more accurately your solicitor) receives the entire amount in a single payment to then pay the seller from whom you're purchasing from.

When you're building your own home, though, the property doesn't exist yet, thus a self-build mortgage pays funds in stages.

In most cases, high street lenders, such as banks and building societies, will not fund the entire cost of a self-build either. They usually agree on a percentage which is typically no more than 75% loan to gross development value after agreeing the costs and will disburse the funds in instalments. Before releasing funds, most lenders would likely insist on viewing the self-built property on a regular basis to ensure the project costs are in check, the building works are running to schedule and the site value is as they expect.

Self-build mortgage criteria are as complex, if not more so than regular mortgages, so the disadvantages are similar, for example, the strict lending criteria, slow pace of lending, general inflexibility and dislike for anything that isn't 'standard'.

Self-build bridging loans

When it comes to self-build projects, self-build bridging loans are more flexible than self-build mortgages. To meet the borrower's demands, the funding can be delivered in a lump sum or in instalments from specialist lenders. Bridging loans are also popular because they don't require periodic inspections, making them a popular option to fund self-build projects.

The interest on bridging loans is frequently 'rolled up' and paid at the end of the loan term. This may be an appealing alternative for self-build projects because it allows people to skip monthly interest payments and put their money towards the new construction.

Like with all bridging loans, they're secured which means in order to raise the finance for a self-build project the loan will be secured against a property asset so it's only an option for those who have enough equity in their property. Typically lenders will only offer up to 80% LTV of the available equity in a residential property or up to 65% LTV on commercial property. Achieving higher LTVs is possible but only where the borrower is able to offer additional property as security and only up to the maximum LTV of the equity available.

Do you need an income for a bridging loan?

The short answer is no, you don't typically need proof of income to obtain bridging finance.

Who is eligible for bridging finance?

Bridging finance is generally available to property owners and investors who need to raise capital quickly but only for a short-term.

The main criteria that lenders will consider when assessing your application is your ability to repay the loan within a relatively short period of time, usually between 12 to 24 months.

If you are looking to apply for bridging finance, a bridging loan broker can help arrange your finance and often access better terms than a borrower would achieve sourcing their own finance.

What's better: a self-build mortgage or a self-build bridging loan?

Self-build mortgages and bridging loans have different advantages and disadvantages, and which finance option will completely depend on the borrower's specific circumstances. The basic differences are outlined below:

Self-build mortgages: Stricter lending criteria, deposit required, funds paid in stages, generally lower interest rate, lenders monitor build schedule.

Self-build bridging loan: Simpler lending criteria, property assets used as security, funds paid in a single lump sum, generally higher interest rate, lenders don't monitor build schedule.

How much cash do you need for a self-build?

The average cost of a self-build project could literally be anything, though most typically range between £250,000 and £500,000. However, the amount of cash you will need to bring to the project will depend on a number of factors, such as the size and complexity of your build, the materials you use and the location of your plot.

What are the types of self-build projects?

There are a wide variety of self-build projects that people undertake, from building a minimalist eco-friendly lodge to constructing an elaborate multi-generational castle. Some people choose to do all the work themselves, while others may hire contractors to help with specific aspects of the project.

Some common types of self-builds include:

Building a new property: This is probably the most ambitious type of self-build project, and will require a significant amount of time, money and effort as well as planning permission. However, it can also be extremely rewarding, giving you the chance to create your perfect home from scratch.

Extending or renovating an existing property: If you're not ready for a complete self-build, you could consider carrying out some renovations or extensions instead. This could involve anything from knocking through walls to creating an open-plan living space, to adding a new bathroom or kitchen.

So are you ready to join the UK's self-builders?

Ultimately, self-building can be a great way to get on, or move up, the property ladder, and there are plenty of options available to help you realise your aspirations.