Self Build Mortgages

When looking to own a property, most people are happy to search for either a newly built or existing property that most closely matches their idea of an ideal home. Others, however, dream of building a new home to their own specifications, where they can have input and final say on everything from the size of rooms to the tiniest cosmetic details. Whether you have the skills and expertise to design and/or build a home yourself, or intend to hire contractors to do the work, you will need a special type of self-build mortgage to fund the plot purchase and construction.

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Author: Carl Shave - CEO and co-founder
Last updated: 14 Jul 2024

What is a Self-Build Mortgage?

Self-build mortgages are the same as residential mortgages, in the sense that you take out a loan to acquire a property. However, whereas residential mortgages release the mortgage funds as a single lump sum to purchase a property, with a self-build mortgage the lender releases the money in stages (or “tranches”) throughout the build process.

Exactly when funds are released varies from lender to lender, but common stages include an initial release to purchase the land, and further releases when the property is, for example, completed to first-floor level, completed to eaves, and when the roof is made watertight. The final tranche is released upon completion of the build. It’s common for the mortgage to operate on an interest-only basis until the final release of funds, upon which it switches to a repayment mortgage.

While all self-build mortgages release funds in stages, some lenders will release payments in advance of each build stage while, more commonly, others will pay out only after each build stage has been completed and signed off by a surveyor. The type of self-build mortgage you take out will depend on whether you have cash upfront to buy materials or pay contractors, or will be relying on mortgage funds to meet payments.

Below are the typical stages of a self-build, whether it may be built of brick/block or a timber frame property:

Stages Brick or Block Timber Framed
Stage 1 Purchase of Land Purchase of Land
Stage 2 Pre lim costs & Foundations Pre lim costs & Foundations
Stage 3 Wall Plate Level Timber Frame Kit Erected
Stage 4 Wind & Watertight Wind & Watertight
Stage 5 1st Fix & Plastering 1st Fix & Plastering
Stage 6 2nd Fix to Completion 2nd Fix to Completion

Useful Information

Mortgage to buy land

The first stage of any self-build project is to find the plot of land that will suit your ambitions for the project, as well as being in the ideal location for where you want to live. You’ll want to make sure that the land has the correct planning permissions to allow for its development in the way you wish, but if it does not then you will need to talk to a planning consultant. They will be able to go over all the details and make an application to the local authority on your behalf, if you do not wish to do it yourself.

The good news is that you do not need to own the plot in order to get planning permission for it. Once you have established that permissions are in place, and you have a plan for how you will manage and complete your self-build project, you will be able to approach lenders for a mortgage to finance the land purchase and construction.

Typically, a lender will offer anything from 50% of the value of the land up to a maximum of approximately 75% (although there are rare examples of 80%) depending on your income, other financial commitments and the anticipated increase in value of the property once the project is completed. Due to the potential for unforeseen complications or delays, lenders will always want to minimise their risk, hence the requirement for a typical minimum deposit of 25% and the practice of releasing the mortgage funds in tranches as and when stages of the build are completed, rather than in advance.

Because of this, and depending on your personal circumstances, it may be more cost-effective to obtain as much mortgage on the land itself as possible and to use your own monies to fund the materials and labour costs. This could reduce the amount of stages required before the lender releases more money and therefore the additional cost of releasing monies each time a stage is reached.

The best way to find out how to most efficiently manage your time, resources and mortgage around your self-build project is to speak to a self-build specialist mortgage broker. Get in touch with our team today and they will discuss your plans in more detail and show you which lender and mortgage deal will be most-suited to meet your needs.

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Advantages & disadvantages of self-build-mortgages

The biggest and most obvious advantage of self-build is being able to oversee the design and construction of your dream home, with control over the specifications, location and timeline, and perhaps even at a lower cost than it would be to purchase an equivalent pre-existing property that may or may not be in an environment of your liking.

You may also find that once the property is finished, the value of the completed project is significantly more than what you will have paid for the land, materials, labour and other professional fees. Just as property developers are able to construct and sell houses at a profit, that hefty margin is what you will be saving yourself. This could result in your household owning a significant asset in future if you come to sell for whatever reason.

You will also see advantages with regard to Stamp Duty. No Stamp Duty is owed on the cost of the building work, only on the price of the plot of land, and you will only have to pay Stamp Duty on the land itself if the cost is more than £125,000. This could mean a saving of thousands of pounds in Stamp Duty on your new home.

As the mortgage you are obtaining is only on the value of the land (although some lenders do allow for an assessment based on an estimated value of the finalised project), the amount of money you need to borrow will also be significantly lower than if you had taken out a conventional mortgage on a ready-built property. You will have a smaller loan to pay back, resulting in lower monthly payments or a shorter term of the loan.

It can often work out a lot cheaper to build your own home than buy a new one if you have planned your self-build project carefully, conducted all due diligence, anticipated any possible complications and made allowances in your budget for contingencies to avoid any unwelcome extra costs.

You’ll find that self-build mortgages are usually quite expensive when compared to standard residential mortgages, with higher interest rates and associated fees. Lenders are working on an assumed increased level of risk on the loan, and so want to ensure that they will see more money returning to them quickly and that whoever takes out the loan takes it seriously. You can go some way to mitigating this risk by being very thorough in your research and planning around the project, so lenders can see you have a detailed grasp of everything it entails.

You’ll also be required to put down a larger than customary deposit to show your commitment to the project and to reduce the lender’s exposure. This is commonly a minimum of 25% of the total cost, but in some cases (such as if the land is already gifted to the applicant) lenders may ask for as much as 50%.

The most obvious disadvantage with a self-build mortgage is the way in which the money is released. With any other type of mortgage, the funds will be released entirely to you upon approval of the application, in order to pay for the property. With a self-build mortgage, because the property does not yet exist, the lender will only release the money in stages, as outlined in the previous section above. This is to limit their risk on the loan and ensure there are assets existing to sell to pay it back should there be a problem during the construction.

Self-build mortgage lenders will usually also need to see detailed documentation relating to the build project, including full floorplans, a fully budgeted costs projection, surveys, a probable timeline for the project, the appropriate planning permission and often any terms set out by your suppliers. If you are lacking in any of the details, then it could be difficult to find an affordable deal on your mortgage.

As a final note, remember that, unless you have a place for your household to live through personal contacts or private means, you will also have to cover your costs for accommodation elsewhere while your self-build project is under construction. This could be the mortgage payments or rental costs on your current home, or paying for temporary accommodation nearby to your self-build project.

As before, building your own home can result in significant savings in the long run. You just need to make sure that everything is carefully planned and executed according to your schedule.

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Self-build mortgage information

While the mortgage market is very dynamic, with interest rates fluctuating and lenders introducing new deals while removing old deals regularly, it’s true to say that in general Self-build mortgage rates are significantly higher than you see for traditional residential mortgages.

With many lenders now offering Self-build mortgages, you will be able to get a general idea of the landscape from comparison charts online, but you should be aware that there are likely to be as many products again unlisted, because they are available only from specialist lenders who do not advertise their services to the public. Despite all your research, you may never know if the right mortgage to exactly suit your personal situation was offered by an alternative provider.

Rates may also vary according to your circumstances, and occasionally we are able to source a deal for our clients on an exclusive basis. In the majority of cases, we tend to recommend a mortgage scheme that does not carry any penalties in the event of early repayment, which will enable you (subject to underwriting) to remortgage the property to another lender at a much-improved rate at a later date.

Despite the higher interest rates attached to self-build mortgages, they will be the means to initially bringing your new home to life. Once the project is complete and the introductory deal period has run its course, you will be able to look to remortgage elsewhere to get a better deal. It is always best to keep in contact with your mortgage advisor to ensure that a remortgage application is applied for at the earliest opportunity to avoid paying more in interest for any longer than you have to.

Self-build projects can be quite complex by nature, and you’ll find that the number of mortgage lenders who choose to offer services to this sector of the market can be quite limited. With this being quite a niche-market area, the approach is quite specialist and this, coupled with a lot less competition for customers, means providers don’t have much pressure to undercut each other, and consequently the rates and fees attached to self-build loans are higher than for customary mortgages.

As mentioned, a few high street lenders do cater to the self-build market, and you will find a few comparison charts online to give you a general picture of the landscape. However, the information available online will not give you the entire picture of what is available across the market, particularly the mortgage products offered by specialist lending companies who do not publicly advertise their services.

These lenders always prefer to work through a trusted intermediary, such as an established mortgage broker like ourselves. This ensures that some kind of vetting process has already occurred, so they can be sure that the potential borrower meets all their criteria and is likely to be reliable, and that their mortgage schemes will be a good fit for the client’s needs – avoiding any unnecessary friction around the deal.

You’ll also find that many lenders will have varying criteria around their approach to self-build projects. Some will require a qualified surveyor to independently assess your building costs and budget, others will not want to lend against certain building types and some will be willing to extend funds in advance of building stages rather than upon completion. Always check thoroughly with your advisor which lender be right for your project, in addition to simply looking at the interest rates and loan durations.

At Just Mortgage Brokers, we have access to the leading lenders in the self-build sector, and will be sure to find the most suitable self-build mortgage on the market to meet your needs, based entirely upon your personal circumstances.

At Just Mortgage Brokers, we have years of experience in helping people find and secure self-build mortgages to enable the construction of their dream home, rather than buying a pre-existing house. The process entails a careful overview of the whole project, as well as the usual assessments for affordability and credit checks.

Due to the complexity of this type of mortgage, it is vitally important to receive the right advice. Every mortgage deal carries its own terms, variations and subtleties, and you’ll want to know that each of them is the best fit for your plans and ambitions for your property. You’ll want to make sure that you’re paying as little as possible in mortgage costs and fees, but you’ll also want to understand how this might balance out with longer-term conditions around the mortgage, such that you avoid paying more than necessary over the lifetime of the loan.

As mentioned, the most suitable deals for a mortgage to fulfil the needs of your self-build project may not be on the high street, but amongst the number of specialist mortgage lenders catering to niche-market property lending in the UK. You won’t see these providers in any best-buy charts or advertising, and you’ll need to approach them through a trusted mortgage broker such as ourselves to have access to their deals.

As mortgage brokers, we have access to self-build mortgage deals from across the UK market, including these smaller, more specialised lenders. Every lender has their own criteria for who they lend to, as well as how they like to see self-build projects managed, and we’ll know which will be the most suited to your particular needs. Call us today to find out more about your options and discuss how we can help.

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