Self Build Mortgages

Building your own home? You may need a self build mortgage

Self build mortgages can be ideal for those intending to build or oversee the building of their own home. 

The process to secure this mortgage product is very different to a traditional mortgages. Some key difference includes the use a self build mortgage calculator to determine the overall costs involved for your project and the need for you to provide extensive paperwork, breakdowns and plans with an application.

The lender will then work from the projected build costs of your project, taking your financial situation and your deposit into account to determine what you can borrow.
 

What is a self build mortgage?

Building a perfect home from scratch is a pipe dream for many. You might plan to mainly do it yourself, using tradespeople like electricians and plumbers where needed. Or you might choose to use a company to design and build your home for you. Either way, if this is a route you want to go down, you will not be able to finance it on a regular residential mortgage.

A self build mortgage is a loan designed to fund the building of your home. There are a few key differences between this kind of mortgage and a regular residential mortgage.

Firstly, your lender will release funds in stages throughout your build project. This is to help regulate your spending and minimise risk for the lender. By releasing funds as elements of the build works are completed, they will be able to see exactly where the money is going and ensure that the project is on track.

When you receive certain funds is dependent on the lender and your particular mortgage deal, but generally speaking, you will receive the first payment once you purchase the land. From that point, you will receive payments at various stages of completion.

For example, you might receive funds once the foundations are laid, another when the roof is watertight, and another once the plaster is complete.
 

What types of self build mortgages are available?

There are two main types of self build mortgages available.

1. Arrears

2. Advance

Arrears is the more common mortgage type. It works as aforementioned, with payments delivered incrementally throughout the building process after tasks are completed. This is better for people who have money to hand who can finance the project upfront until payments arrive.

Advance is for people who need to receive the payments before each building task begins. This removes the need for short-term assistance , such as bridging loans . Seen as a much higher risk investment for mortgage lenders, it is rare that you’ll be offered this type of mortgage funding. However, it’s not impossible, and it is absolutely still worth speaking to an experienced mortgage lender about this option.

It’s important to note that interest rates are generally higher on these kinds of mortgages than a residential mortgage.
 

What are the advantages of a self build mortgage?

There are many benefits to a self build mortgage. These include:

• The ability to build your dream home
• Exemption from Stamp Duty (except for on the cost of the land itself, and even then only if it exceeds £125,000)
• Overall financially savvy - the value of the property itself usually surpasses the building costs incurred
   

What is the application process like for a self build mortgage?

Understandably, the application process for a self build mortgage differs significantly from a regular mortgage.

Before you apply, you will have to have a good idea of the projected costs of your project. You will need a particular build and plot in mind and detailed plans breaking down materials and labour required. You will also need to consider your energy plans for the property.

You can enter your details into an online build cost calculator to give you an idea; however, the calculated figures will be only an estimate. Because everyone's circumstances and projects are different, it’s hard for a mortgage calculator to get the measure of what you might need to borrow.

Luckily, The Lending Channel can help. As experienced mortgage advisors, we can assist you in clarifying what your costs are likely to be and what the mortgage payments will look like. It is always the best option to seek advice from an expert, rather than rely on technology, as we can take the nuances of your particular situation into account.
 

How much can I borrow with a self build mortgage?

As with every case, it varies. Depending on your financial situation, your circumstances and the limits of the lender, the figure will be subject to a full affordability assessment. They will also take into account the intended size of the property and your deposit.
 

Do I need a deposit for a self build mortgage?

In most cases, yes. Generally, you will need a 20% deposit to buy the land and a further percentage of build costs to start your build. This can range from 15%-50%, depending on the specifications of many lenders.

However, if you are already the landowner and have received planning permission, you may not have to pay a deposit. Providing it’s mortgage-free, you may be able to receive a loan based on the value of your land.