Building your own property is an exciting opportunity to create the home you’ve always envisioned. Instead of settling for an existing property, a self-build project allows you to design your dream home from the ground up. However, financing such a project requires a specific type of mortgage: a self-build mortgage. In this guide, we’ll explore everything you need to know about self-build mortgages, including their types, funding stages, eligibility criteria, and the role of a self-build mortgage broker in simplifying the process.
What Is a Self-Build Mortgage?
Unlike standard residential mortgages, which release funds upon the purchase of a property, self-build mortgages release funds in stages throughout the building project. These stages correspond to key construction milestones, ensuring you have the necessary funds to keep your project on track. The funds may be released at the start or end of each construction stage, depending on your agreement with the lender. While advance payments provide upfront cash for materials and labour, arrears payments require you to finance the construction stage first and reclaim costs later.
Types of Self-Build Mortgages
Advance Payment Mortgages
With advance payments, lenders release funds at the start of each construction stage. This option is ideal if you don’t have substantial savings or access to other funds, such as equity from another property. Advance mortgages improve cash flow and reduce the need for short-term financing like bridging loans. However, fewer lenders offer advance payment mortgages, and some may retain a percentage of the loan until your property receives its completion certificate.
Arrears Payment Mortgages
Arrears payment mortgages release funds at the end of each construction stage. While this option typically offers more competitive interest rates, it requires you to have sufficient financial reserves to cover initial costs. Lenders usually conduct a site valuation at the end of each stage to confirm progress before releasing funds.
Stages of Funding
Self-build mortgage funds are typically released at the following milestones:
- Land Purchase (if covered by the lender)
- Foundation Completion
- Walls Erected
- Property Wind and Watertight
- Plumbing, Electrical, and Plastering Work Completed
- Final Fixes and Project Completion
Using a Self-Build Mortgage to Buy Land
Before you can build, you’ll need a plot of land. Some self-build mortgage lenders will finance the land purchase, provided it has outline planning permission—a confirmation from the local authority that your proposed development is acceptable in principle. Consulting a planning expert can help ensure the required permissions are in place before purchasing the land.
Eligibility for a Self-Build Mortgage
You don’t need to be an experienced builder to qualify for a self-build mortgage. Many applicants hire professionals such as architects, surveyors, and builders to manage the project. Even first-time buyers can apply if they meet the lender’s criteria.
Key Requirements:
- The property must be your primary residence upon completion.
- You’ll need to provide detailed plans, including cost projections, schedules, and risk assessments.
- Affordability checks will consider your income, expenditures, and credit history.
If your project involves a property you intend to sell for profit, you’ll need development finance instead.
How Much Can You Borrow?
Most lenders offer up to 75% loan-to-value (LTV), meaning you’ll need a 25% deposit. Specialist lenders and private banks may offer higher LTV ratios or more flexible terms, especially for high-net-worth individuals. Some lenders even offer 100% LTV mortgages if you can provide security, such as the land itself.
The Role of a Self-Build Mortgage Broker
Navigating the complexities of self-build mortgages can be challenging. This is where a self-build mortgage broker becomes invaluable. With in-depth knowledge of niche products, a broker can:
- Match you with the right lender based on your project and financial situation.
- Access exclusive broker-only deals.
- Ensure your application meets lender criteria, including planning permissions and construction specifications.
- Streamline the process, saving you time and effort.
Our brokers at The Mortgage Blog work closely with lenders across the Uk to secure competitive self-build mortgage deals tailored to your needs.
Costs and Considerations
Interest Rates
Self-build mortgages often come with higher interest rates than standard residential mortgages due to the increased risk for lenders. However, some lenders offer deals like interest-only payments during construction to improve cash flow.
Fees
Be prepared for various fees, including:
- Planning application fees
- Survey and valuation costs
- Lender fees
- Legal expenses
- Architect and building regulation fees
- Insurance costs
Contingency Fund
Setting aside 10-15% of your project costs as a contingency fund is wise to cover unexpected expenses or delays.
Advantages of Self-Build Mortgages
- Bespoke Design: Tailor every detail of your home to suit your preferences.
- Cost Savings: Building your own home can be cheaper than buying an existing property.
- Stamp Duty Benefits: Pay stamp duty only on the land (if applicable) and not the completed property’s value.
- Potential for Higher Value: Upon completion, your home’s value may exceed the land’s combined cost and construction costs.
Disadvantages of Self-Build Mortgages
- Higher Interest Rates: Reflecting the lender’s increased risk.
- Large Deposit Requirements: Often 25% or more.
- Complex Documentation: Detailed plans and permissions are essential.
- Temporary Accommodation Costs: You must finance alternative living arrangements during construction.
FAQs About Self-Build Mortgages
What is the difference between a self-build mortgage and a standard mortgage?
A self-build mortgage releases funds in stages rather than as a lump sum, accommodating building projects’ unique cash flow needs.
Can I use a self-build mortgage to renovate an existing property?
Some lenders allow self-build mortgages to fund extensive renovations or property conversions.
Do I need planning permission to apply for a self-build mortgage?
Outline or full planning permission is usually required before applying for a self-build mortgage.
What happens if I run out of funds mid-project?
You may need to apply for additional financing, such as a bridging loan, or request an early release of funds from your lender. Having a contingency fund can help prevent this issue.
Can I switch to a standard mortgage after completing my self-build project?
Yes, once your home is habitable, you can remortgage to a standard product, often at lower interest rates.
Conclusion
Building your dream home is an ambitious yet rewarding endeavour. A self-build mortgage broker can simplify the process, ensuring you secure the right financing for your unique project. With the right guidance and preparation, a self-build mortgage can turn your vision into reality. Contact The Mortgage Blog on 0333 335 6595 or message us to explore your options and get personalised advice tailored to your unique situation.
