Self Build Mortgages
If you’re planning on building your own home, you’ll need a self build mortgage instead of a traditional mortgage.
But, self-build mortgages can be complex with different requirements and expectations compared to a normal mortgage application.
Let’s take a look at what self build mortgages are, how they work and answer some common questions about the process of getting started with one yourself.
What are Self-Build Mortgages?
A self-build mortgage is a type of home loan that you can use to build your own home, rather than buy an existing property.
The UK has two different types of self-build mortgages available to those who are building their own home.
Arrears Self Build Mortgages - the most common self build mortgage type in the UK.
With this mortgage type, the lender only releases funds after each stage of the construction has been completed.
This requires you to have the cash upfront or bridging loans in place to pay for the construction and materials before you receive the funds from the lender for reimbursement
Advance Self Build Mortgage - The funds are released at the beginning of each stage of construction so you have the cash available to pay for builders and materials when required.
Although this is the easier self build mortgage option for many as it means you don’t need cash or other loans, there are only a small number of lenders that offer this mortgage type - it’s riskier from a lender’s perspective and so can be more expensive.
Self Build Mortgages Key Takeaways
Self-build mortgages are a type of home loan that allows borrowers to build their own home, rather than purchasing an existing property from a developer.
Eligibility for a self-build mortgage depends on meeting the lender's criteria, including having an acceptable level of income and creditworthiness.
Self-build mortgages can come with higher interest rates and arrangement fees compared to traditional mortgages, and borrowers should budget for additional costs such as valuation fees, legal fees, and other charges.
Planning and organisation are key to success when it comes to self-build projects, and borrowers should take care to manage the process carefully to avoid unexpected costs and delays.
While self-build mortgages can offer borrowers the opportunity to build their dream home, it's important to weigh the costs and benefits carefully before deciding whether this type of financing is right for your needs and circumstances.
When considering a self-build mortgage, it's essential to weigh the advantages and disadvantages to decide if this type of financing is suitable for your needs and circumstances.
Pros of Self Build Mortgages
Cons of Self Build Mortgages
Self-build mortgages often come with higher interest rates and fees compared to traditional mortgages due to the increased risk associated with self-build projects.
Managing a self-build project can be challenging and time-consuming from long before the mortgage application. They require significant planning, organisation, and oversight to ensure a successful outcome.
Construction costs can escalate due to unforeseen issues or material price changes , potentially leading to budget overruns and additional financing requirements.
Not all mortgage lenders offer self-build mortgages, and those that do may have strict eligibility criteria, potentially making it more difficult to secure financing.
As most self build mortgages pay in stages after the work has been completed there may be cash flow issues and other sources of finance required.
Lenders typically require self-build projects to be completed within a specified timeframe, which may put pressure on you to finish the project on time and avoid potential penalties or difficulties in refinancing.
Eligibility Criteria for Self-Build Mortgages
Applying for a self-build mortgage often involves meeting specific eligibility criteria set by lenders.
These requirements help lenders evaluate the feasibility of your project and assess any risks or problems with your plans.
Lenders typically require a deposit ranging from 15% to 25% of the total project cost, including land purchase and construction expenses.
A larger deposit may improve your chances of securing a mortgage and result in more favourable loan terms.
Stable Income and Good Credit Score
As with traditional mortgages, a stable income and a good credit score are essential factors in determining your eligibility for a self-build mortgage.
Applicants with bad credit may face challenges in securing financing, although some lenders may consider other factors.
Detailed Project Plan
Lenders will require a comprehensive project plan, including architectural drawings, planning permissions, estimated construction costs, and a proposed timeline.
This plan helps lenders assess the project's feasibility and the likelihood of successful completion.
Working with an experienced builder or contractor is crucial for the success of your self-build project.
Lenders may require you to provide information about your chosen builder's qualifications, track record, and references.
Lenders will evaluate your ability to afford the self-build mortgage by considering your current income, existing debts, and financial commitments.
This assessment helps determine the maximum loan amount you can borrow.
Build Type and Construction Method
Some lenders may impose restrictions on the type of property or construction method used in your self-build project.
Unconventional building techniques, materials, or designs may require further evaluation before lenders approve financing.
Insurance and Warranty
Lenders typically require self-builders to obtain suitable insurance coverage, such as self-build site insurance and structural warranty, to protect the project from potential risks and ensure the property's long-term structural integrity.
Make sure you have everything in place and are supported by professionals such as architects, surveyors and builders.
This can improve your chances of securing a self-build mortgage and successfully completing your dream home project.
Self-Build Mortgage Application Process
Applying for a self-build mortgage can be a lengthy and complex process, but it doesn't have to be overwhelming.
Provide Detailed Project Plan
As mentioned earlier, a detailed project plan is a crucial component of the self-build mortgage application.
You must provide comprehensive information about the construction project, including architectural drawings, planning permissions, estimated construction costs, and a proposed timeline.
The lender will use this information to assess the viability of your project and determine if it meets their lending criteria.
Select a Lender and Mortgage
Once you have a detailed project plan, it's time to shop around and compare self-build mortgage lenders.
You should compare interest rates, fees, and other loan terms to find the best option for your needs.
You can use mortgage comparison sites or work with a mortgage broker to help you find the right mortgage product.
As well as all the normal information and documents you would expect to submit during a mortgage application you will also need project plans and supporting documents for the build.
Valuation and Survey
Before approving your self-build mortgage, your lender will conduct a valuation and survey of the plot and the proposed build.
This ensures that the project's estimated value aligns with the loan amount and identifies any potential issues that may affect the project.
The survey may include a site inspection, and your lender may require adjustments to the design, construction methods, or materials to mitigate potential risks before approving the loan.
Once the valuation and survey are complete, your lender will provide a formal mortgage offer.
Before accepting the offer, it’s essential to engage in a thorough legal review of the mortgage documents, as well as any relevant contracts and agreements related to the construction project.
This step typically involves hiring a solicitor or conveyancer who specialises in self-build projects.
They will ensure the mortgage terms are fair, protect your interests, and help you navigate any planning permission, building regulations, and contractual obligations with builders and suppliers.
By taking the time to address legal matters, you can safeguard your investment and avoid potential pitfalls during the construction process.
After your mortgage offer has been accepted and the legal process has been completed, the funds will be released depending on the type of mortgage.
With an arrears self-build mortgage, your lender will release funds after each stage of the construction has been completed.
With an advance self-build mortgage, your lender will release funds at the start of each stage of the construction process.
Costs of Self Build Mortgages
Here are the common costs of self build mortgages:
Other additional costs
The costs associated with self-build mortgages will vary depending on several factors, such as the loan amount, interest rates, and fees charged by the lender.
Here’s a more detailed breakdown of each cost:
Self-build mortgage interest rates can be higher than those for traditional mortgages, as lenders perceive them as a higher risk.
Rates can vary between lenders, so it's essential to shop around and compare different deals before deciding on a mortgage.
These are fees charged by the lender for setting up the mortgage. They can range from a few hundred to several thousand pounds, depending on the mortgage product and the lender.
Some lenders may allow you to add the arrangement fee to the loan amount, but this will increase the overall cost of your mortgage as you'll pay interest on the added fee.
Lenders will require a valuation report on the land and the proposed property to ensure the project is viable and the completed property will be worth the loan amount.
Valuation fees can vary depending on the complexity of the project and the size of the property, but typically range from £200 to £600.
You'll need to hire a solicitor or conveyancer to handle the legal aspects of your self-build project, such as land purchase, planning permission, and mortgage documentation.
Legal fees can vary widely depending on the complexity of your project, but you should budget at least £1,000 to £2,000 for these services.
Depending on the lender and the specific mortgage product, there may be other fees and charges associated with your self-build mortgage.
These can include early repayment charges, exit fees, and administration fees. Be sure to review the terms and conditions of your mortgage agreement carefully and ask your lender to clarify any costs you're unsure about.
Make sure you have a clear understanding of the costs associated with your self-build mortgage, it's essential to obtain a detailed breakdown from your lender before committing to the loan.
This will help you budget for your project and avoid any unexpected costs arising during construction.
Can I get a self-build mortgage if I have bad credit?
While it may be more challenging to obtain a self-build mortgage with a poor credit history, it'snot impossible.
Some lenders may consider your application if you can demonstrate that you have a stable income, a strong business plan for your self-build project, and a significant deposit.
It's best to consult a mortgage broker who specialises in self-build mortgages, as they can help you find a suitable lender and guide you through the application process.
How much deposit do I need for a self-build mortgage?
The deposit required for a self-build mortgage typically ranges from 25% to 40% of the total project cost, including land purchase and construction costs.
However, the exact amount will vary depending on the lender and your individual circumstances.
In general, a larger deposit will improve your chances of securing a self-build mortgage and may result in better interest rates and terms.
Can I use a self-build mortgage to renovate an existing property?
Yes, some self-build mortgages can be used for renovation or conversion projects, such as converting a barn or other non-residential building into a home.
In these cases, the lender will consider factors like the complexity of the project and the expected increase in the property's value when determining the loan amount and terms.
t's essential to discuss your specific project with a mortgage broker or lender to determine the best financing option for your needs.
Is there government support available for self-build projects in the UK?
The UK government does provide some support for self-builders through the Right to Build scheme, which aims to make it easier for people to find suitable land for their self-build projects.
Under this scheme, local authorities are required to maintain a register of individuals and groups interested in building their own homes and must ensure there's enough serviced land available to meet demand.
However, it's important to note that this scheme does not provide financial assistance for self-build projects.
What happens if my self-build project goes over budget?
If your self-build project goes over budget, you'll need to find additional funds to cover the extra costs.
This could involve using your own savings or applying for additional financing from your lender.
It's important to monitor your project's budget closely and maintain open communication with your builder and lender to avoid unexpected cost overruns.
If you expect budget issues, it's best to address them as early as possible to minimise the impact on your project's timeline and overall cost.
Are self-build mortgages more expensive than traditional mortgages?
Self-build mortgages can have higher interest rates and fees compared to traditional mortgages due to the increased risk associated with self-build projects.
But the overall cost of a self-build mortgage will depend on factors such as the loan amount, interest rates, arrangement fees, and other charges.
It's important to compare different mortgage options and consider the total costs involved before deciding on a self-build mortgage.
Do I need to own the land before I can get a self-build mortgage?
No, you don't necessarily need to own the land before applying for a self-build mortgage.
Many lenders offer self-build mortgages that cover both the land purchase and construction costs.
In these cases, the mortgage funds are typically released in stages, with an initial amount provided to purchase the land and subsequent payments made as construction milestones are reached.
However, if you already own the land, this can make your self-build mortgage application more attractive to lenders and may result in better loan terms.
Can I live in my current home while building my self-build property?
Yes, many people choose to remain in their current home while constructing their self-build property.
This can provide a stable living situation and make the self-build process less disruptive to your daily life.
However, you'll need to consider the financial implications of maintaining two properties, including mortgage payments, utility bills, and insurance costs.
Some self-build mortgage lenders may consider your current mortgage payments when assessing your affordability, which could impact the amount you can borrow.
Are there any restrictions on the type of property I can build with a self-build mortgage?
Lenders may have specific requirements or restrictions on the type of property you can build using a self-build mortgage, including minimum and maximum property sizes, adherence to specific building standards, or limitations on unconventional construction methods.
Also, your self-build project must comply with local planning regulations and building codes.
It's crucial to discuss your project's details with prospective lenders and to obtain the necessary planning permissions and approvals before starting your self-build project.
How long do I have to complete my self-build project?
The timeframe for completing a self-build project will vary depending on the complexity of the build and any unforeseen delays.
Most self-build mortgage lenders will require your project to be completed within a specified period, usually 12 to 24 months from the start of construction.
It's important to have a realistic project timeline and to work closely with your builder and lender to ensure you can meet the required deadlines.
If you encounter any delays, communicate with your lender promptly to discuss your options and avoid potential penalties.