Advance stage payment mortgage

With an advance stage payment mortgage, the cost of the build and land is worked out and split into the various stages.Then the money, (up to 95% of the cost of land and build), is released at the start of each stage giving the self builder positive cash flow. This makes the build process easier and quicker than with an arrears stage payment mortgage, as the self builder has money to pay for labour and materials as they fall due and there is no need for interim valuations as lending is based on cost and not value.

The lender needs to ensure that their money is protected, so advance payment mortgages include a short term valuation guarantee policy to protect the lender for the amount of money they have lent above their normal lending criteria. The cost of this is not high and when you take into account the saving of about £250 in the interim valuations which are not needed for an advance payment mortgage, the client is paying little if anything for the benefit of positive cash flow during their project.

Arrears stage payment mortgage

With the arrears payment mortgage, money is released at the end of each stage of the build after the work has been completed and an interim valuation carried out. These interim valuations cost from £35 - £50 and up to 5 are carried out during the build. An arrears stage payment mortgage is deemed to protect the lender because they are not releasing money until they are told by a Valuer that there is sufficient value in the building on site to support the borrowing so that in the case of a repossession, the lender can get their money back.

Typically lending will be between 75% - 95% of the cost of the build and some but not all will lend in advance to purchase the land on which the house will be built.

It is therefore not difficult to see that with these mortgages the client can experience cash flow problems as they have to complete and pay for large parts of the build before getting money from the lender. As a result, many self builders with these mortgages sell their current house to release equity and move into rented accommodation or to a caravan on site.

Difference in cash flow between an arrears and advance stage payment mortgage!

Stage of build	Cost of stage	Standard arrears stage payment self build mortgage lending	Advance stage payment Self Build Mortgage lending	Additional cash flow provided by advance stage payment mortgage at each stage
Purchase of land	£65,000	£48,750	£61,750	£13,000
Preliminary costs and foundations	£13,000	£0	£12,350	£25,350
Wall plate level	£17,000	£9,750	£16,150	£31,750
Wind & watertight	£17,000	£12,750	£16,150	£35,150
First fix & plastering	£12,000	£12,750	£11,400	£33,800
Second fix to completion	£16,000	£9,000	£15,200	£40,000
Final payment from standard mortgage when build complete		£40,000
Totals	£140,000	£133,000	£133,000

This table shows how the advance payment scheme does not hold back any of the money until the completion of the build unlike the arrears payment scheme.