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Choosing the right mortgage – the importance of cashflow

Mar 22, 2023 | Cashflow, Guaranteed stage payments, Mortgages, News, Self build

The importance of cashflow

‘Choosing the right mortgage’ is a series of articles written by Chris Martin, Head of Product and Lender Relationships at BuildLoan, exploring the different factors brokers must consider when advising customers undertaking a self or custom build project.  This first article looks at the importance of cashflow and how lender valuations can cause unnecessary uncertainty for clients.

With well over two decades of experience helping people fund their homebuilding projects, we know that the most critical feature of any stage payment finance product for the self or custom builder is the certainty that they will get the money they need at the time they need it.  The peace of mind of knowing that they will be able to pay for materials to keep their build moving or to pay their contractor to keep them on site is paramount.

The nature of a mortgage to fund an individual self build is that funds are released in stages as work progresses.  Some self build mortgage products rely on a site valuation to decide how much can be released to the client at that time – usually between 60 and 80% of a valuer’s assessment of the site value.

The value of the site mid-build is determined by working backwards from the expected value of the completed home, then taking into account the costs to get the house finished and perhaps an assumption of some desired “profit” – although for most people building their own home for their family to live in and enjoy – profit isn’t the primary motivation.

Even at the best of times, money spent on part of a build won’t necessarily be reflected in the valuer’s calculation of the site value at that time.  In the current climate of uncertainty, there is added caution over values, and the risk of your client not getting the money they need is far higher. At worst, this could leave them unable to progress their build or scrabbling around trying to pull funds together from family, friends or pension funds to rescue their project.

BuildLoan’s products offer a unique solution to this problem – the funds given to the customer at each stage release are directly linked to the cost of either the upcoming stage of work (known as advance stage payments) or the stage of work just completed (arrears stage payments).

As there is no need for a formal site valuation before funds are handed over to the borrower, the amount of each release can be agreed at application stage and included in the mortgage offer. This takes away a vast amount of uncertainty, when self builders already have a lot to think about.

BuildLoan’s advance stage payment products provide an even greater boost to cashflow with money to pay for the next stage of work released before they even start that part of the build. With more people now looking to build a more efficient home, to reduce the environmental impact and cost of running their home, demand for products to fund a timber frame or offsite manufactured home is increasing. Our advance stage payment products are ideally suited to pay for this type of build, with up front payments available to fund the cost of the timber frame or kit. 

For most brokers, a request to help to arrange a self build mortgage is rare and recommending the best product for that client is much more complex than many other products.  It’s vital that within your factfinding, you explore the type of build your client is planning, the amount of cash they have available and how important it is for them to have certainty about the amount of funding they will get from their lender at each stage of the project.

When reviewing possible mortgage products, ensure you fully understand how stage payments are calculated.  If this is worked out by the lender asking their valuer to provide a site value, make sure your client understands the risks and is happy they can cope if they don’t get the expected funds.  Bear in mind they will probably come to you for help if their build comes to a standstill due to lack of funds!

Unless your clients have significant cash in the bank to cover every eventuality, make sure you look at BuildLoan’s products because they have been specifically designed to offer peace of mind and guaranteed funds.