A Guide to Self-Build Mortgages
If, as is the case with many self-builders, you find yourself without the funds upfront to finance your project, you may need to explore the option of securing a self-build mortgage. However, it's vital to understand that self-build mortgages differ significantly from standard residential ones.
To help you navigate the process, we've compiled this guide covering everything you need to know about self-build mortgages. We'll go over:
What is a self-build mortgage and how do they work?
As the name implies, a self-build mortgage is specifically designed to finance the construction of a property you're building yourself.
Unlike a traditional residential mortgage, where you receive the entire loan amount upfront, a self-build mortgage disburses funds in stages as different parts of the construction process reach completion.
This phased approach mitigates the lender's risk and ensures that the funds are used according to the planned construction timeline.
When are the funds released with a self-build mortgage?
If you're constructing your own property from the ground up, you can expect to receive mortgage payments at the following milestone stages:
Land purchase (supported by planning permission)
Foundation laying
Construction up to eaves height, before the roof installation
Roof completion, making the property weatherproof
First fix (e.g., plumbing and electrical installations)
Second fix (e.g., interior fittings)
Confirmation of property completion via a certificate
What are the different types of self-build mortgages?
Self-build mortgages come in two main types: advance and arrears mortgages.
Advance self-build mortgage:
With an advance self-build mortgage, your lender disburses payments upfront at the beginning of each construction stage. This allows you to cover material and labour costs, including purchasing the land if you haven't already.
This type of self-build mortgage is beneficial for maintaining cash flow throughout the project. Having said this, fewer lenders offer this option and the interest rates may be less competitive compared to the alternative.
Arrears self-build mortgage:
With an arrears self-build mortgage, funds are released after the completion of each stage. This means you need to manage expenses for materials and labour until each stage is completed to the lender's satisfaction.
While more lenders provide this type of mortgage, you'll need sufficient cash reserves to cover costs upfront while waiting for mortgage payments. Bridging loans can be an option to cover these costs, to be repaid later with the mortgage payments.
What are the advantages of self-build mortgages?
Stamp duty savings: Unlike purchasing an existing property, self-build projects often involve paying stamp duty solely on the land value, potentially resulting in substantial savings. Stamp duty is not applied to the construction costs or the property's value upon completion, unless the land value surpasses £125,000.
Increased property value: Upon completion, your property's value could surpass the total expenses incurred during construction, including land, materials, and labour costs. This potential for higher value offers a favourable return on investment.
Cost-effectiveness: Through meticulous planning and hands-on management, self-builders can often achieve cost savings compared to buying an already-built home. By personally selecting materials and managing labour, expenses can be minimised.
Fulfilment of personal vision: Self-building provides the opportunity to create a bespoke home tailored to your preferences and lifestyle, allowing you to realise your dream home or incorporate specific features that are important to you.
What are the disadvantages of self-build mortgages?
Risk of financial setbacks: While self-build mortgages can offer cost savings, there's also the risk of financial loss if the project encounters complications or deviates from the original plan. Failure to adhere to the agreed timeline or budget could result in financial strain, or even loss of financing.
Time-intensive process: The process of finding suitable land, engaging architects, contractors, and procuring materials can be time-consuming. It demands patience and dedication to manage these various elements effectively, potentially extending the overall project timeline.
High deposit and interest rates: Due to the inherent risks associated with self-build projects, lenders often require a sizable deposit. Moreover, interest rates and fees for self-build mortgages tend to be higher compared to conventional mortgages, reflecting the increased risk for the lender.
How to get a self-build mortgage
The documentation required for a self-build mortgage largely mirrors that of a standard mortgage application. Albeit, additional supporting documents are usually needed, such as:
Copy of planning permission
Copy of construction drawings and specifications
Estimate of total project costs (preferably based on fixed-price contracts)
Building Regulations approval documentation
Site self-build insurance and structural warranty certificates
Architect's professional indemnity cover, if applicable
As a guideline, a deposit of at least 25% of the total project value is normally required. In some cases, lenders may request a deposit of up to 50%.
It's important to note that, in addition to the deposit, you'll need to budget for alternative accommodation during the construction period. Your lender will also conduct standard checks, including a credit score assessment and affordability evaluation.
If you want to get an idea of your eligibility before you apply, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to highlight any possible mistakes or fraudulent activity on your profile, so that you can quickly deal with such problems. The trial and subscription can be cancelled at any time.
How much can I borrow with a self-build mortgage?
The amount you can borrow with a self-build mortgage varies based on several factors including your lender's policies, your financial situation, and overall circumstances.
If you already own the land where you plan to build, you may typically borrow up to 75% of the anticipated property value.
Although, if you don't own the land, the mortgage provider will consider various factors such as building expenses and land acquisition costs. These factors can dramatically influence the amount of funding you can secure.
Can I switch to a normal mortgage when my home is built?
Once your self-build project is completed and certified by a surveyor, you have the option to remortgage.
To proceed, the property must be valued and deemed habitable. Your mortgage lender or building society will then extend an offer for a standard residential mortgage, generally at a more favourable interest rate.
However, before making the decision to remortgage, it's essential to review your existing mortgage agreement for any early repayment fees.
Speak to a self-build mortgage specialist
Due to the intricate nature of self-build mortgages, they are primarily offered by specialist lenders, with larger institutions instead focusing on traditional residential mortgage products. Given this landscape, seeking guidance from an experienced mortgage broker is strongly recommended.
At The Mortgage Genie, we specialise in navigating the complexities of self-build mortgages. Our expertise not only guides you through the entire process, but also ensures you secure the most suitable deal for your unique situation.
Contact us today at 01915809890 to speak with our team of expert mortgage brokers. And why not see how much you could borrow up to today by using our mortgage calculator?
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.