Are ‘Self Build’ mortgages about to become classed as ‘Commercial’?
For many people changes to self build mortgages won’t mean a lot, after all a mortgage is a mortgage right? Well not quite.
The big difference for lenders is about the capital they have to set aside, if it still means nothing then let me try and explain. You may have heard talk of ‘capital’ and that lenders need to have stronger balance sheets, well it all comes from here, so keeping it simple;
- When a secured loan is advanced then the lender needs to set aside 8% of the loan total as cash
- For a normal residential mortgage the lender has to put aside 38% of that 8%
- For a commercial mortgage the lender has to put aside 100% of that 38%
In other words it is more expensive to lend for commercial reasons than it is for standard residential reasons.
So what does this mean for self build mortgages?
Self Build Mortgages
At the moment the PRA cannot reach a final decision on self build, so we are a little in limbo. What limbo causes is a lethargy among lenders who would prefer to sit tight and see what happens.
Particularly in Sussex and the South East, there are a number of homeowners who are looking at the land their property sits in and seeing value in undertaking a self build. With property prices increasing and land at a premium you can start to see the appeal.
How will it change being able to obtain a self build mortgage? We will need to wait and see, although it could go one of several ways, which are not actually all bad.
Self Build Mortgage Options
The future for self build loans could go something along the lines of;
- If they are classed as commercial loans then it opens the sector to more lenders, potentially making the loans easier to secure. Good news
- The cost of will go up, but the benefit to the homeowner remains in the added value. That’s a breakeven
- It stays as it is. Not a lot to say, self build is already a fairly restricted market so maintaining the status-quo may not be the best result
We await the ruling from the PRA, however at this stage it may be a change that looks bad news but could work in the borrowers favour, and you don’t say that very often!
For any questions please get in touch.
By Dave Farmer