Self-Build mortgages

Building your own home can give you a truly unique place that reflects your lifestyle and personality. But you’ll need to work out how to finance it. A self-build mortgage can help turn your dream into a reality, but there are risks you need to be aware of.

Building your own home can give you a truly unique place that reflects your lifestyle and personality. But you’ll need to work out how to finance it. A self-build mortgage can help turn your dream into a reality, but there are risks you need to be aware of.

Daniel Evans
From the Mortgages team
4
minute read
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Posted 26 JULY 2021

What is a self-build mortgage?

A self-build mortgage is a loan you take out to finance building your own home.

Before you apply for a mortgage to build a house, you'll need to think about whether you want to do most of the work yourself (you’d need to be highly skilled) or whether you’ll be overseeing the project and hiring qualified people to design and build the property for you.

Whichever option you choose, it’s likely you’ll need a mortgage to fund it unless you have a huge amount of savings sitting in the bank. But it will be a different mortgage to the type most house-buyers take out as the property hasn’t been built yet.

How do self-build mortgages work?

When you get a mortgage to build a home, the lender releases the funds in key stages as the build progresses. You don’t get a single lump sum on completion like you would with a standard residential mortgage. It’s done this way to reduce the risk to the lender, and they can make sure the money is being spent as outlined in your mortgage application.

The exact timing of when funds are released depends on the lender, but you’ll typically receive payments when you:

  • buy the land
  • lay the foundations
  • build the framework of the property
  • finish the interior plastering, plumbing and electrical wiring
  • complete the project and get the home valued.

A property valuer will usually visit the site at each stage to check that the work has been completed and is on track with the project plan.

What types of self-build mortgage are available?

The type of self-build loan you get will determine when you receive your funds from the lender.

  • Arrears is the most common type of self-build mortgage. Payments are released after each stage of the build is completed and a property valuer has visited the site. For this kind of mortgage, you’ll need to use your own savings or borrow cash to start the build.
  • Advance payments are handed out at the start of each build stage, before bills for materials and labour are due. This type of mortgage helps with cashflow and means you won’t need short-term borrowing, but lenders are less likely to offer this kind of deal.

What are the benefits of self-build mortgages?

The benefits aren’t so much to do with the mortgage itself, but rather the advantages of building your dream home rather than buying one that’s already built.

No stamp duty
One of the major benefits is that you don’t have to pay stamp duty on the building costs or the value of the property once the work is finished, potentially saving you thousands of pounds. You only have to pay stamp duty on the value of the land itself. Stamp duty normally kicks in if the cost of the land is more than £125,000. But because of the COVID-19 pandemic, the threshold has been temporarily increased to £250,000 from 1 July to 30 September. It will go back to its usual rates from 1 October 2021. 

Higher value than build cost
The other main benefit is that your home is likely to be worth a lot more when it’s finished than the total cost of what you spent on the land, materials and labour.

What are the disadvantages of self-build mortgages?

While house-building mortgages have their advantages, there are some downsides you may want to think about.

Bigger deposit needed
If you’re building your own home, you’ll usually need a larger deposit than you would for a standard mortgage. It can be at least 20% of the total project value, although in some cases you might be asked for as much as 50%.

Planning permission needed
Lenders will usually want to see proof that planning permission has been granted for the build before they’ll approve you for a mortgage.

More paperwork
It probably won’t come as much of a surprise that there tends to be more paperwork involved with a self-build mortgage. You’ll need to produce detailed plans of how you’re going to build your new home, what self-build financing you’ll need at every stage and an estimate of the final costs.

How much can I borrow with a self-build mortgage?

With self-build finance, you can typically borrow up to 75% of the total cost of the land and 75% of the projected costs for building the house. A few lenders will lend up to 85% or even 95% of the land and property value, but this is rare.

Just how much you can borrow, though, depends on your financial circumstances and self-build plans. As with traditional mortgages, lenders will look at your income and outgoings, and check your credit score to work out how much they’re willing to lend you.

Because of the risks involved in self-build projects, like long delays and unforeseen costs, lenders tend to be cautious about letting people borrow with a self-build mortgage, so it’s important to be as financially organised as possible.

Once your new home is finished, you can switch to a traditional mortgage deal to get a lower interest rate. Bear in mind that most self-build mortgages have early repayment charges though.

All mortgage applications are subject to status and lending criteria and are based on your individual circumstances. Applicants must be 18+ and a UK resident. Your home may be repossessed if you do not keep up with your mortgage repayments.

How do I find a self-build mortgage?

Most of the big banks don’t offer self-build mortgages, so you may need to use a building society or specialist lender. And some lenders will only offer house-building loans if you apply through a mortgage broker.

Because self-build mortgages are complex, it could be a good idea to speak to a self-build mortgage broker to find out what’s available and how much you might be able to borrow.

Self-build mortgage rates (the amount of interest you’ll be charged) are generally higher than regular mortgage rates. That’s because there’s less choice and lenders may consider self-build mortgages to be riskier. It can also be harder to qualify for a self-build mortgage. So, to give yourself the best chance of getting a good deal, make sure you plan your self-build home project carefully and do your homework beforehand.

Other ways to finance a self-build home

A self-build mortgage might not be the right option for you. You might want to consider other ways you could fund the building of your new home.

Savings
If you’ve built up a large savings pot, this could be the most economical way to fund some or all of your project. Some self-build mortgage providers will only lend on the building itself and not the land, so you might need a lump sum to buy the land in the first place.

Remortgage
If you have a lot of equity tied up in your current home, you could release some funds by switching to a new mortgage deal. Only remortgage if you're planning to stay in your existing home while the build progresses.

Personal loan
If you only need to borrow up to £25,000, a personal loan could be an option.

Bridging loan
A bridging loan is a type of short-term funding to help bridge the gap between buying a new home and selling your old one. You could use this to finance your self-build, then once your home is completed get a traditional mortgage to repay the loan. But be aware that bridging loans usually have high interest rates and can be very high risk - you could lose both homes if you can’t keep up with your repayments.

What else do I need to think about?

Before you take the plunge with your self-build, there’s a few other things to bear in mind.

  • Where will you live while your new property is being built? In your current home? With friends or family? Or will you rent a place? This could affect how much you’re able to borrow.
  • Cashflow and a well-managed budget are paramount with a self-build project, so you’ll need to make sure you have money available when you need it. Don’t forget about fees for land purchase, construction design, site preparation, planning permission and so on.
  • As a condition of your mortgage, some lenders will only accept builders registered with an acceptable Building Standards indemnity scheme, and won’t allow certain types of construction methods. You must also have self-build home insurance in place.

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