How do I apply for a mortgage for a self-build or renovation?

So, you want to commission a one-off build or build your own home? Will a lender work with you? We consult the experts

When renovating, it’s vital to get the estimated valuation of the finished property right. Picture: iStock

Self-building can cover everything from boldly commissioning a house, and rarely putting a welly on site, to getting truly, deeply hands-on. Additionally, every year, many brave DIY warriors and seasoned trades dive into serious and essential renovations of their forever home.

So, what are the general rules around self-build and renovation mortgages, and how available are they?

Martina Hennessy, managing director of mortgage broker and online switching company Doddl.

We first asked Martina Hennessy, managing director of mortgage broker and online switching company Doddl.

“Not all lenders offer mortgages for self-builds,” Martina explains. “Lenders that do offer mortgages for self-builds are Permanent TSB, Bank of Ireland (BOI), Haven Mortgages, AIB and EBS. This is because some lenders don’t have the facility to release funds by way of stage payments.

When building, a bank will release funds to purchase the site (if not owned/gifted) and then, as the works progress, your engineer/architect will certify works and the bank will release funds once the works are completed, and the value is in the site/property, adds Martina.

“A final inspection of the property is always required for final drawdown and may be required at roof stage or at the lender’s discretion.”

The number of staged payments that you can draw down, depends on the project and lender. PTSB allows a maximum of six, BOI between six and eight, and Haven (AIB Group) suggests six to eight as reasonable.

Speaking of Haven, Martina adds, “You need to reach the full €250k of draw-downs within 18 months to get cashback. You should discuss a payment schedule with your builder or architect to ensure everyone is aligned re the financing of the project.”

Lenders will only take in the lower end of the valuation when considering a mortgage for purchase and refurbishment. Picture: iStock

So, what do we need to plan for in terms of a deposit and costings for a self-build to encourage a lender to work with us? Can we use the site as a deposit?

“If the site is gifted or owned the value of the site can be used as your deposit to meet loan-to-value criteria under Central Bank rules,” Martina explains. “These loan-to-value rules are that first-time buyers have to have a 10% deposit, and second/subsequent buyers a 20% deposit. The percentage is based on site value plus the cost of works to be completed equals value on completion.

“If the site is being gifted by a parent and the application is a joint application and where applicants are unmarried, depending on the value of the site, from a tax perspective you may need to consider applying for a mortgage on a joint mortgage, sole title basis.

The recipient of the gift/site being the person only on the title so as not to trigger a CAT tax liability for the unrelated party. If buying the site then you can borrow 90% if a first-time buyer, or 80% if a second-time buyer, of the cost of the site plus cost of works.”

In terms of planning permission (PP), Martina emphasises that all but one lender, expect you to have PP in place and every lender will expect your build costs to be professionally prepared.

“All lenders require this except for Haven (AIB Group), who will condition planning permission on approval,” Martina says. “If purchasing a site and looking to finance same based on a mortgage, the bank will want PP before progressing as they are lending a ‘home loan’ mortgage. They will not risk that the site will not get planning. Without planning it is really just land.

“The full cost to build needs to be priced, set out and confirmed by an architect” Martina advises.

“Prior to approval, the bank will need to see a full breakdown, drafted by a qualified professional, architect or engineer. The figure including VAT and contingency is the figure the bank will take into account as the cost of build works. Overruns are common” Martina adds, “So, the bank will want to see that you have allowed for a contingency and that you are eligible for the mortgage including the contingency amount (in savings or borrowings).”

So, what if we burn through the projected costings and the contingency funds? In this current climate of escalating building costs, this seems like a real danger with a self-build.

“You should immediately notify your mortgage lender to establish if additional funds can be approved or if approval is at the maximum level based on current circumstances,” says Martina.

“Also, the value of the property is another issue here. Even if you can get approval for additional funding based on income, the value may not be in the property to allow you to borrow more. The bank will lend based on lower end of cost or estimated value on completion.”

Finally, what about applying for a mortgage retroactively — after you have commenced work on a place, and need money to pay for self-build? Martina is clear: “It’s much better to apply in advance of starting the works. Works have to be released by way of stage payments and the bank will want evidence of certification of works carried out to date and to ensure they are signed off by a relevant professional, architect/engineer etc. It is very tricky to fund a partly complete property.”

Renovating a dilapidated old dear, an existing building or breathing new life into a ruin, can be as nerve mincing as building afresh. Sometimes it can prove structurally even more complex.

Helen Slattery, mortgages manager at Sys Group.

Helen Slattery is mortgages manager at financial consultants Sys Group.

“For a lender to approve, it will require proof that there are sufficient funds (between the mortgage and applicant’s own funds) to renovate the house fully. They require that a house is liveable in at completion stage, they will not approve a mortgage unless there are sufficient funds to complete it,” she says.

“Part of the reason for this condition is that an incomplete house is not easily sold in the event of repossession.”

Not all lenders will lend for a serious renovation project, says Helen. “This requires stage payment releases and not all lenders have the facility to do this. However, if you are switching your mortgage and require some renovation funds this can be processed as one payment from the lender. Whether or not payments are made in a staged manner or not is dependent on a case-by-case basis.”

Are the criteria for lending for a renovation project the same as for a finished, extant house. That is, the deposit, and multiples of their yearly income?

“Absolutely,” says Helen. “The Central Bank’s lending rules apply to all mortgages, regardless of whether they are for a turnkey purchase, purchase and renovate, or a self-build house. The max that you can borrow is the lower of 3.5 times gross earned salary or 80%/90% of the value of the house. First-time buyers can qualify for a mortgage of up to 90% borrowings and non-first-time buyers can qualify for up to 80%. 

"New rules set out by the Central Bank will see the mortgage borrowing limits for first-time buyers rise from 3.5 times their gross income to four on January 1, 2023. The lending limit for second-time buyers will change from 80% to 90%.  A first-time buyer is defined from the new year to include borrowers who have been divorced/separated, have undergone bankruptcy or insolvency, as long as they have no interests in their previous property.”

What about engineer certification, is it always needed to release the mortgage for a renovation? “As a guideline, if works are up to €70k and you don’t require planning permission you most likely won’t need an engineer’s sign off,” Helen explains.

So, if I buy a house that needs a moderate amount of renovation, how is the money for the project released to me?

“The monies are received in two stages,” Helen expands. “At house-purchase stage the mortgage lender will release funds of up to 80%/90% of the house purchase price (depending on whether you are first- or second-time buyer) and then the renovation funds are released according as works are completed and invoices sent to the lender. The lender will retain a certain amount of the mortgage funds until all of the works are completed and a final valuation has been received and approved by them.

“If you are switching your mortgage the renovation funds can be released at the same time as the mortgage is being switched. This is because the lender will know the value of the house at the outset. I always recommend that my clients have funds approval prior to starting the works. If they have funds approval in advance they will know what their borrowing limit is and can then work within that limit.

“Always tell your broker if you plan on borrowing for a purchase and renovate house as this will influence the broker’s choice of lender for you.”

Do mortgage lenders take into account SEAI grant aid for deep retrofitting a renovated home with renewable tech/heating system/insulation/windows? “Yes, lenders will take into consideration any form of guaranteed funds towards the house purchase/renovation,” says Helen. “It won’t necessarily influence the deal but it does mean that the applicant will need to borrow less which is a positive. This may also reduce the applicant’s overall loan-to-value borrowings which may result in a more favourable interest rate.”