Cost of build exceeds market value

mike_2009

Hi,
I've been chasing the potential to build my own house for the last year. I'm trying to tie up the land sale but the revaluation added 25% which was a shock. All told the house is going to end up costing more to build (development costs, land, build costs etc) than it will be worth on the open market.

My question is around mortgages for self builds. Does anyone know how banks approach this situation? I've a deposit saved and if I get the full 3.5 x salary I'll be fine but the market value is a good bit below that so what cap will be bank put on things or will they refuse altogether? I'm happy to live in the house until I pass on so the negative equity is acceptable to me but what way will the bank view it?

I'll be talking to a few of them later this week but wanted to get some insight so I'm sure of the right questions to ask them.

Example:
House costs 350K to buy land, pay development costs and build
3.5 x salary let's say could get me up to a 330K mortgage and assume I've a 50K deposit saved

So, does the bank throw their arms open and give me a 330K mortgage? =297K principal so I've to come up with 33K to cover the 10% deposit (90% LTV) and 20K for the remaining gap which is doable.

Or...House is worth 280K second hand on open market - so does the bank cap the mortgage at 280K?
=252K principal, 28K to cover 10% deposit (90% LTV) I blow the remainder of my deposit and I'm STILL 48K short if that makes sense? That's my worst case scenario here....

How does a bank go about getting a valuation of the house before it's built? I know they'll be getting a full cost breakdown from the Architect but given the gap how does the bank decide it's worth?

Thanks!

Update - just reading up on this - an initial valuation has to be done by an independent person. How do they determine the value based on plans etc - do they use the property price register, what other similar houses sold for in the area or look at the quality of the build to determine market value? I think understanding this will be critical if the bank use the lower of the two figures (build cost vs market value).

FiOT

Hi Mike,

I'm not sure if I'm about to answer your questions here but I can give you an outline of how things were for us.

We bought our site outright (subject to planning) and owned this when we approached the banks. This was a big positive for us in the bank's eye, I guess they are never really going to lose money on us and the site was worth more than what we paid for it after it had full planning permission attached (so they say - I think things are only worth what people are willing to pay for them).

We went to the bank with the site as our "deposit" so we got to keep our savings which turns out to have been fantastic, cash is very handy to have in self- building for those hidden costs between stage payments.

Perhaps this is not the norm but basically the bank asked us how much we wanted to borrow, we could have borrowed 100% of the build if we wanted as we owned the site. Once this was agreed the bank sent out a valuer of their choosing to view the site and the plans. He then gave a valuation from which the bank calculated the LTV rate based on how much we wanted to borrow v the value of the house, in turn giving us our mortgage interest rate. The valuation does not seem to be an exact science; seems mostly based on location, number of bedrooms and general layout and aesthetic. I think he took into consideration that a new enough property down the road sold at a similar price in the months before.
I am fairly sure that valuation on completion will be a different figure, only time will tell whether it will increase or decrease!

Not sure if this helps, please ask any questions if I've missed out on anything!

mike_2009

Thanks!
Interesting scenario - am waiting for a valuer to ring me back but that's a good approach. I'd like to have cash on hand during the build for exactly that reason but if I buy the site that will blow my savings. Appreciate the help!