Building a new house on your land while you have a mortgage

[AccountantMum]

Has anyone had any success in building a new house on your land while you have a mortgage?
We are close to being granted planning permission however our mortgage company need to sign s106; and this will be an issue as we are planning to build a new property (instead of just extension).

Has anyone any experience in this and know the best way to proceed? Will we really need to pay off the mortgage and get another?

Thanks!

It sounds as though you intend to split the title of your property and build a separate residential property in part of your garden?

The reason that your mortgage company need to sign is because everybody who has an interest in the land (ie both the owner and anybody who has loaned money with the property as security) is required to sign the S106 agreement.

In some areas, councils are using a Community Infrastructure Levy (CIL) charge instead of S106.

You can't just sell off part of your garden without the consent of the lender.

Reducing the size of your garden and being overlooked will likely affect the value of your property.

What most lenders would do is to revalue the property on the basis of you having sold off the land for this new property and compare the LTV and see if it's inside the limits for whatever your mortgage deal says.

Eg maybe you've got a low rate with a limit of 50% LTV but selling off this land would mean that the LTV goes above 50%.

If the LTV isn't a problem then the lender will generally not have any problem with signing, if it goes outside the LTV limits then they will ask you to use some of the money from the sale to reduce your mortgage.

Has your current lender said that they will not sign the S106 agreement? Are they a major bank (most of these types of lenders are used to seeing S106 agreements) or a smaller company that perhaps is not used to dealing with these?

EDIT

I just checked and where I live the local council mostly use CIL but also still use S106 for larger developments where site-specific mitigation measures are needed and for affordable housing provision.

The current CIL charges for a site of less than 15 houses ranges from between £100 and £140 per square metre.

Sorry, those were old figures. I just found the latest figures for my local council and they now range from £147 to £206 per sq metre for less than 15 houses.

There are some exceptions to having pay the CIL though, if you buy a plot of land and self build a house (either yourself or through a contractor) then you don't have to pay this. Likewise if you're building a separate annex on your property and you're not intending to sell it off as a separate home then you don't have to pay CIL.

Although, interestingly, if you buy a property and then demolish the house and replace it with a larger one you are liable for CIL on the increased size of the new property.

For example, you buy an old bungalow with a big garden. The bungalow is 90 sq m. You demolish it and replace it with a new four bed home that is 200 sq m. In this situation you will have to pay CIL on the difference, 110 sq m (200-90)

With S106 and self build, it depends where you live. Most councils exclude self build homes from S106 but a few do make charges (or at least used to in the past).

Thanks - this is 1 self-build house which will be attached to our current house (turning our semi into a terrace).

We were surprised the council required a s106 but they have insisted and the document has been reviewed by our bank (a well known building society).

We don't plan to sell either house immediately and had initially thought the bank would be happy to accept as this will increase the value of the propert(ies) (as the 2 homes or even one with planning permission) would be worth more than the one alone - but it seems this isn't the case and may need to get some advice.

Our architect isn't particularly helpful - and the council seemed to think the lender would have no issue in signing - maybe it could be possible to take the land beneath the new house out of the mortgage as we have sufficient equity to do this but not sure if this still leaves an issue with the new house being built attached to the existing house. The council will not grant permission for a detatched home as not in line with the road.

This is where you need specialist advice. I think there are two separate issues here.

One is dealing with the building society and the other, separate, issue is the S106 agreement.

The S106 issue is probably easier to deal with. Does this just involve a payment of money or are there other requirements as well?

If it's just money then it depends how much they're asking for. I'm aware of one council where the S106 payment for a three bed home is around £2,500. In contrast, where I live the CIL payment for a 100 sq metre new home would be between £14,000 and £20,000.

If the S106 agreement requires a lot of money then you might wish to approach the council and see if they have a self build exemption for S106 (most councils do). If this is the case then you sign the S106 agreement and then apply for the exemption afterwards. But get advice specific to your own council.

However, this is only for self builds so you would need to move into the new property yourself and use that as your main residence, usually for at least three years, while letting out your current property.

If you don't move into the new property yourself then you can't claim the self build exemption.

I think the issue with the building society is a different matter.

"maybe it could be possible to take the land beneath the new house out of the mortgage as we have sufficient equity to do this..."

This would be a straightforward thing to do - Form TP1 (transfer of part of registered property) would create a separate title and is a standard thing that any experienced property solicitor can do.

"...but not sure if this still leaves an issue with the new house being built attached to the existing house."

It just creates a party wall and that's fine as long as the owner of the existing house (you) agrees.

As to what the building society would say, I don't know, but I imagine they would take the same approach ie revalue the property as a mid-terrace with a small(-er) garden.

Thank you helpful and sounds promising - we are happy to pay amounts in S106 and to sign the document the issue we have is the lender is not happy to sign the document and that means council will not formally approve planning application

Did the building society give a reason for not signing the S106 and, if so, was the money the only objection they had to constructing another building attached to yours?

You really do need advice specific to your own situation but, if it were me, I would split the garden off into a separate title and go through whatever the process is with your building society for you to do that so that there is no charge over the separate piece of land. I think it's something like Form DS3.

In that way, you have a separate title and there is no mortgage on that land. You can then sign the S106 agreement yourself and there is no building society to get involved.

After you have planning permission you will likely need to inform the building society about any building works that will affect your existing house if appropriate, as most mortgages included a clause saying something like:

"You must not carry out any structural alterations or additions to the property or change its use without our written consent"

But again, get advice specific to your own situation about all of this.

Hello,

I am also building a house onto my existing buy to let. Did yiu managed to get your lender to agree ?