What are your options when building your own home?
We’ve all thought at one point how great it would be to build our own homes. Maybe you watched some Grand Designs or DIY SOS and thought ‘I could do this’.
So where to start with financing something as big as building your very own home? Self-build mortgages are one way to fund this.
We don't compare this type of mortgage - this guide is for informational purposes only. But you can compare remortgages.
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What is a self-build mortgage?
As with other mortgages, a self-build mortgage is type of loan you apply for.
The main difference with a self-build mortgage is that you should get the loan in parts rather than as a single lump sum.
When do I get each part of the mortgage?
The stages of getting your self-build mortgage align with the stages of building your property. Normally lenders give five payments:
- Funds to buy the land
- When you lay the foundations
- After the walls are built up to roof level or most of the shell of the building has been built
- When the building is watertight, roofed and plastered
- Final funds after the property is finished.
This may vary between lenders, and some may have a different instalment plan.
What types of self-build mortgages are there?
There are two types of self-build mortgages - arrears and advance:
Arrears is the most common type. After each build stage, a professional valuer will inspect to approve your next payment.
This might be better suited to those who have enough cash on hand to pay for their projects.
Advance is the opposite of arrears as the lender releases payments at the beginning of each build stage.
This might be better for those who have less money readily available to fund their project. You could use these funds to buy your materials or hire labourers to complete that next part.
Can a self-build mortgage be used on other building works?
Yes, you can use a self-build mortgage if you’re looking to convert a barn or build an annex or outhouse in your garden.
Pros and cons of self-build mortgages
To help you work out whether a self-build mortgage a viable option for you, we’ve compiled a list of pros and cons:
- Could be cheaper – if planned well, between the materials you choose, labour could be less than if you bought a home ready made
- You could avoid stamp duty – as you’re buying land with nothing there. Stamp duty applies to properties over £125,000 in value so you may end up not paying for it
- Chance to build your dream home – or at least have things you know you want
- You need to be patient and wiling to project manage every part of this – from finding architects to organising builders and sourcing materials
- Risk of losing financing if you don’t stick to the agreed plan
- Finding the right spot of land might be time consuming
How do I apply for a self-build mortgage? Are they easy to get?
Like with standard mortgages, you’re assessed by risk. But with a self-build mortgage, it’s a higher risk for a bank or lender to give you the money.
There isn’t a house they can use as security if you can’t make the repayments. That’s one reason why you get the money in parts – to show you’re moving through the self-build process.
When you apply for a self-build mortgage, you’ll have to show your lender:
- A detailed copy of your construction
- Planning permission
- Architect’s professional indemnity cover
- The total cost and if you can, showing any fixed-price contract prices
- Building Regulations approval
- Site insurance
- Structural warranty.
Your lender will also make standard checks, like credit history and other affordability checks.
Again, this is due to the risk e.g. you end up behind on your building schedule, or something unavoidable happens.
The interest rates tend to be higher on self-build mortgages than they are with standard mortgages.
Increasing your deposit could be a way to help lower your repayments. The self-build mortgages on offer range from 60%-80% LTV, so it’s worth researching to see what you can get.
What checks do I need to make throughout the self-build process?
While sketching up your dream home may be fun, you need to be aware of all the checks you need to have while going through the home building process.
You’ll also have to weave these into your plans, so they don’t hinder anything.
- Planning permission
- Construction drawings and specifications
- Buildings Regulations approval
- Proof of site insurance
- Proof and information of your architect’s professional indemnity cover.
Are there any alternatives to a self-build mortgage?
Self-build mortgages aren’t the only way to fund your construction. Some other options that may suit your financial situation better could be: