It's a dream for many people to build their own home. You may expect that when you come to buy a property, you'll either buy one that has been lived in or buy one off-plan from a housing developer. If you're imaginative and prepared to take a few risks, you could as an alternative build your own home with the assistance of construction loans.
What is a construction loan?
In simple terms, it's a loan that you can use to pay for the cost of building your new home. It's usually a short-term loan and can be offered for a specific amount of time – generally around a year – giving you the time that you need to complete the build. When the build is finished, you'll have to pay off the construction loan by taking out a new loan, often known as the "end loan." That means you'll need to refinance at the end of the construction loan term, and many people have a standard mortgage at a fixed or variable rate to move things forward.
How does a construction loan compare to other similar products?
You need to look at rates, which are likely to be more expensive than an ordinary mortgage. That's because the lender doesn't have a tangible asset, just something that is expected to be constructed. It's hard for a lender to value this, and so if property prices in the neighbourhood fall or the builder doesn't do a good job, the lender could suffer from a poor investment. Banks and other financial institutions may be wary of lending for this type of loan, so you need to work on giving your potential lender confidence that the project will be successful.
What are the main features that you need to consider for a construction loan?
You need to know that you can afford it – you may only pay interest on the sums that a builder draws down from the loan, but you need to know that you can refinance at the end of your project and afford those payments. Your lender will want the involvement of a qualified builder and be provided with detailed specifications for the building, including what materials will be used, and a timescale. Expect to put down quite a large deposit as lenders will want to see that you are investing in the project as well as them. A good credit rating will help when lenders are weighing up whether or not to support you.
Are there serious risks?
There can be if you're not meticulously organised. Timescales frequently slip for construction projects, sometimes due to poor weather conditions, sometimes due to a builder not adhering to the project timetable. Delays can cost you money, so you need to tie everything up contractually as tightly as you can, including penalty clauses for delays. Make sure that the plans for the building are accurate and what you want, and take the time to discuss these in detail with your builder, and ensure that the lender also has them. Your reward at the end? Your own home, exactly how you want it, and a great asset for the future.