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Everything You Need to Know About Self-Build Mortgages

No, a self-build mortgage isn’t a loan you choose the terms of (wouldn’t that be nice?). Self-build mortgages are for people who are renovating or building their own home from scratch, and they let you drip-feed money into your build project at key stages. Here’s everything you need to know about self-build mortgages.

What are the two types of self-build mortgages?

The most important thing to say upfront is that you’re going to pay a higher interest rate on a self-build mortgage – usually between 4% and 6% – and it’s harder to get because you’ll need to meet enhanced affordability checks, since you’ll likely be renting or paying a mortgage somewhere else, too. Once your home is liveable, you should be able to drop it down to a more reasonable rate, but that’s not a guarantee, so check your terms first.

There are two types of self-build mortgages:

  • Arrears: This is the more common type. Payments are handed out after each stage of the build is completed. This type of mortgage is better for people who have a lot of cash on hand to help pay for the project.
  • Advance: Payments are released at the beginning of each stage, making money available when the bills for labour and materials are due, removing the need for bridging loans or other short-term borrowing. This type of mortgage helps with cash flow and is better for people who have less money on hand to fund their project. Fewer lenders are prepared to offer this kind of mortgage, however.”

Regardless of whichever you choose, the money is released at key stages (for new builds):

  • When you get the land and planning permission
  • At the substructure
  • Just before you have the roof trusses go on, aka wall plate/eaves height
  • When the windows and roof are finished and it’s wind and watertight
  • At the first fix and at the second fix
  • Upon certified completion

It’s slightly different for mortgages on renovations or conversions, so check with your lender.

Why would you want a self-build mortgage?

You’d probably want one if you don’t have the money to finance your build upfront, which most people don’t, seeing as homes can cost hundreds of thousands to build. Another reason is to skip out on paying Stamp Duty; you won’t pay it if the land is less than the threshold, and you don’t pay on build costs or the finished home at all. This can save you tens of thousands in the long run on a highly-valued home.

How can you apply for a self-build mortgage?

You’ll need to plan about 3 months for the process. It takes longer than a standard mortgage. According to Homebuilding, “the documentation required is essentially the same as a standard mortgage. However, additional supporting documentation will be required, which may include:

  • Copy of planning permission
  • Copy of construction drawings and specifications
  • Copy of total project cost estimate (where possible, fixed-price contracts)
  • Copy of Building Regulations approval
  • Copy of site insurance and structural warranty
  • Architect’s professional indemnity cover (if required)
  • SAP calculation (this will be in the Building Regulations package)
  • Experian credit report

Expect to pay for several valuations, too. They’ll do one in advance to determine the current and future value, then do one in the middle to see if you’re on track, and finally, another at completion of the build. These can be several hundred pounds each time, so make sure to budget for them.

Common questions about self-build mortgages

Q. How much can I borrow?

A. It’s standard to receive 75% of land and build costs as a self-build mortgage, but some lenders may offer more.

Q. Do I have to sell my current home before my new house is ready?

A. Not necessarily. If you have savings for 15-25% of the land, materials, and labour costs, then no. If not, you may need to unlock that equity by selling before taking on a self-build mortgage.

Q. When should I start the mortgage process?

A. ASAP. You need to know your budget before taking on an architect. You won’t want to get married to a design you can’t afford. Talk to a lender and get some estimates of what you can borrow before you have plans drawn up.

Q. What are the common interest rates?

A. Buildstore says, “Interest rates currently range from 3.99% - 5.99%, with most lenders offering interest-only during the build – so you only pay interest on the funds drawdown and keep your monthly payments affordable. What’s more, when your new home is complete, you can switch to one of your lender’s traditional mortgage deals, which will have a lower interest rate and bring your payments down.”

Q. Can I borrow on the estimated completed house value?

A. Yes, depending on the lender. You could get a loan based on up to 85% of the final home’s value.

Q. How much would it cost?

A. Here’s a great example from Ecology:

A mortgage of £95,300 payable over 25 years on our Standard Variable Rate, currently 4.15%, would require 300 monthly payments of £510.96.

The total amount payable would be £154,553.92 made up of the loan amount plus interest (£58,214.92) and a mortgage application fee of £799 and a valuation fee of £240 (assuming a purchase price of £200,000). The overall cost for comparison is 4.40% APRC representative.

Other ways to finance a build

If you’re worried about taking on a self-build mortgage, there are other options:

  • You could pay in cash (if you have a spare +/-£500k laying around).
  • You could sell your home and live with a relative/friend or in a rental, hotel or caravan.
  • You could re-mortgage your existing home to draw equity out of it.
  • You could get a custom build mortgage (which is a little different and has some restrictions and benefits baked in.)
  • You could borrow from friends and family.
  • You could crowdfund your build through flexible micro-lending platforms.

However you do it, you’re likely to need a conveyancer. Get a ton of great quotes from local conveyancers in minutes with our fabulous, free online tool.