Self-Build Mortgages Explained

The prospect of building your own home is exciting – after all, it brings with it the opportunity to create the perfect environment for you and your family.

You’ll be able to choose the size, design, fixtures and decor of your home, and it could even save you money compared to buying an existing property.

But building your own home is also a huge undertaking that comes with many hurdles – and, before you can jump any of them – you’ll need to work out how you’re going to pay for it.

For many, this will involve taking out a self-build mortgage.

Here’s a round up of what you need to know.

What is a self-build mortgage?

A self-build mortgages allows you to borrow money to buy the plot of land you want to build on, as well as finance the build of the property itself.

Unlike a regular mortgage, where funds are released at completion, with a self-build mortgage the loan is released in stages, typically as various parts of the build are completed.

This is to help minimise risk for lenders who want to be sure the money will be spent as planned and won’t run out before the project is finished.

Exactly when funds are released varies according to the self-build mortgage lender. But the following key stages are common:

• Purchasing the land
• Building the foundations
• Constructing the property walls
• Making the building wind and watertight (adding the roof, windows and external doors)
• Completing plumbing, electrical wiring and plastering
• Completion of project and getting the home valued.

What types of self-build mortgage are there?

There are two main types of self-build mortgages:

Arrears stage payment

The most common kind of self-build mortgage, this is where the funds are released to you in arrears – as every stage is completed. A property valuer will typically visit the building site at every stage to check the work has been finished and the project remains on track before the lender will release the money.

You’ll need to cover material and labour expenses upfront yourself before recouping the costs.

This makes an arrears stage payment mortgage most suitable for self-builders with plenty of cash to hand, or those willing to use a bridging loan or other short-term borrowing to cover the costs upfront.

Advance stage payment

Here, the lender will release payments at the beginning of each build stage which means you can use the funds available to pay for materials and labour costs.

This kind of self-build mortgage is therefore a better option for those with smaller savings pots. There’s also no requirement for a valuer to visit the site before each payment.

However, fewer lenders offer advance stage payment self-build mortgages.

Can I get a self-build mortgage?

Lenders tend to be especially cautious around self-build mortgages – and qualifying requirements depend on the mortgage provider.

To improve your chances of being accepted for a self-build mortgage it’s crucial that you produce detailed plans for your property, as well as supporting documents such as:

• planning permission
• construction and architect drawings
• building regulations approval.

You’ll also need to provide a projection of the costs involved and timeframes, plus risk assessments and contingency plans.

It’s recommended you build a minimum of 20% contingency into your build cost estimate.

Where you intend to live while you build your home will also be taken in to account. If you already have a mortgage or pay rent, your mortgage or rental payments will affect your affordability calculations, for example.

A good credit history, large deposit and proof of reliable income will also stand you in good stead and increase your chances of being approved – even if you’re a first-time self-builder.

What deposit do I need for a self-build mortgage?

Mortgage lenders in the self-build sector require larger deposits.

As a general rule of thumb, lending is capped to around 75% of either the total cost of the land and building, or the final valuation of the property.

Some self-build mortgage providers will lend more, depending on circumstances. For example, Ecology Building Society lends up to 80% of the completed property value on a repayment loan basis, but only up to 65% on an interest-only basis.

Halifax Intermediaries says it will lend up to 75% of the final valuation so long as the loan does not exceed the total cost of buying the land and build works.

You may be able to borrow more through specialist self-build mortgage broker, Buildstore. It says it can offer self-build loans of up to 95% of plot and build costs either in arrears or advance stage payments – so long as your plans and sums stack up.

With a myriad of options and variables available, it’s well worth contacting a mortgage broker with experience in the sector before making any decisions about your self-build mortgage.

What are self-build mortgage interest rates like?

Interest rates for self-build mortgages tend to be higher than for standard mortgages – typically between 3% and 6%.

As with standard mortgages, you can usually choose from a fixed rate – where the rate of interest remains the same for a set time – or a tracker, where the interest rate can fluctuate.

In any case, the better your credit score and the larger your deposit, the more likely you are to secure a competitive rate.

You may well have to pay a product or arrangement fee which could be a few hundred or a few thousand pounds, depending on the lender and the mortgage deal.

Many lenders allow you to repay your mortgage on an interest-only basis during the build period. This means your monthly payment will be lower as it will only go towards paying off the interest charges and not any of the capital borrowed.

Once the property has been completed and a RICS qualified surveyor has confirmed the home is habitable, you should be prompted to switch to a standard mortgage with a lower interest rate. Just watch out for early repayment charges.  

What about stamp duty?

One of the biggest benefits of a self-build mortgage is that you won’t have to pay stamp duty on the building costs or on the property value when it’s complete. This has the potential to save you thousands of pounds.

Stamp duty will only be payable on the land itself and only where the land cost more than £125,000.

This has temporarily been increased to £500,000 until 30 June 2021 due to the Covid-19 pandemic.

What else should I consider?

Before starting a self-build, carefully consider who will do the work. If you’re a builder, plumber or electrician by trade, you may be able to carry out some work yourself, hiring other tradespeople where necessary to keep costs down.

Consider also whether you plan to manage the project yourself.  Tradespeople, a surveyor and an architect are among the people you will need to employ.

If you don’t have the time – or don’t want the responsibility – you can hire a contractor to manage the project on your behalf, at extra cost of course.

Are there any alternatives?

If you’re not sure a self-build mortgage is right for you, there are several other options that could help you to fund your build:

Savings: Providing you have enough saved up you could use your savings to help fund your dream home.

Remortgage: If you have enough equity in your current home, you may be able to remortgage and borrow more against your property at the same time.

Personal loan: Personal loans are unsecured which means you do not have to use an asset as collateral. The downside is they tend to be capped at £30,000 so are more likely to serve as a top-up rather than funding an entire self-build project.

Secured loan: This type of loan allows you to borrow significantly more than a personal loan. But you will need to secure it against an asset such as your property. If you cannot keep up with your repayments, you risk losing this asset.

Bridging loan: This is a type of short-term finance which can be used to purchase land quickly. Terms can vary from one month to three years and you can typically borrow £25,000 or more.

As bridging loan are designed to be short term, interest rates are high. You may also need to secure the loan against both your current property and the one you’re building.

However, once your project is complete, you can apply for a standard mortgage to repay the loan.