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Insights on money, career and trading

How to finance a house build

Posted on October 2, 2015 by Daniel at 8:16 am

Financing a house build needs to be carefully considered and planned as unexpected costs can often crop up throughout the project.  When financing a house build, most people will factor in a buffer for additional project costs. These increased costs can arise from a myriad of different scenarios from difficulties in planning and securing the plot through to problems with ground works and unforeseen delays such as those caused by the weather.

There are a number of different ways in which you can finance a house build, each scenario will be different and it’s important to carefully assess the outcomes of the project before making a decision, which might prove difficult or even impossible to reverse.

Broadly speaking there are three main ways that a house build can be financed – using savings, selling your current property, and borrowing money.

Savings 

If you are in the position to finance your house build through your own savings then you are in a much stronger position to proceed quickly. However, this is not without risks, as you might find that the project takes up a significant percentage of your savings and, should circumstances change, such as the project taking much longer to complete than anticipated or an unforeseen loss of income, it can leave you in a very difficult situation.

Selling your current property 

Most people will look to sell their current house to raise the funds to finance the house build. However, this can be both costly and inconvenient.  It can mean you need to rent a property, or stay with family or friends, to cover the period between selling your current property and completing the new build.

Borrowing 

Taking out a mortgage to finance a house build can take a considerable amount of time to complete. This can be frustrating when you are ready to start the project, particularly when there are plots available for purchase.

One possible solution is to take out a short-term loan to bridge the gap between applying for your mortgage and the funds becoming available.  These short-term loans are called bridging loans and can be extremely useful when considered sensibly.  Whilst they may attract a higher interest rate than a long-term loan, the period of the time for which the money is borrowed is significantly less and, when costs such as having to rent a property in the interim are considered, they can actually prove to be very cost effective.  Bridging loans also are much more straightforward to arrange than long-term financial products such as mortgages, making the process a lot easier than you might imagine.

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If you are financing a house build with a bridging loan, very specific underwriting required, which is very likely to include a valuation. You should be aware that the valuation might be less than the market value for both the plot of land, and the property you currently own.  It’s also important to remember that you will be paying for the house build over weeks or more likely months unlike than making one large purchase when you buy a completed property, so cash flow must be considered.  With a bridging loan, it may mean that your existing cash flow can remain relatively smooth, which, in many cases, offers a lot of peace of mind.

Of course, financing a house build is a major decision for both seasoned house builders and first time builders alike but, with sensible and detailed planning, it can be a very rewarding and exciting project.  It’s also worth mentioning that, should you wish to sell the completed house build, depending on location, build quality and of course, the state of the wider property market, you may well end up with a significant return on investment which, coupled with the sense of achievement that comes with completing such a project, can make financing a house build incredibly worthwhile.

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Insights on money, career and trading