LAST UPDATED: 3rd January 2023 by The Editorial Team
Summary: How a self build mortgage works, what to consider and how to get a self build mortgage
What is a self build mortgage
Self-build mortgages are a type of mortgage specifically designed for people who are planning to build their own home. These mortgages provide financial assistance to help cover the costs of building a new home, including the purchase of a building plot, the cost of construction materials and labour, and other related expenses.
In the UK, self-build mortgages are typically available from a range of lenders, including banks, building societies, and specialised mortgage providers. The terms and conditions of these mortgages can vary, so it’s important to shop around and compare different options to find the one that best meets your needs.
Self-build mortgages can be a good option for people who have a clear vision for their dream home and are willing to take on the challenges and responsibilities of building it themselves. It’s important to carefully research and compare different mortgage options and to carefully consider your financial circumstances before committing to a self-build mortgage.
The major difference between a self build mortgage and a conventional house mortgage is that with the self build version you will receive your mortgage funds in several stages as your house build progresses compared with a single lump sum.
Applying for a self build mortgage
When applying for a self-build mortgage, you will typically be required to provide detailed plans and specifications for the home you plan to build, as well as an estimate of the total construction costs. You may also be required to provide evidence of your ability to pay back the mortgage, such as proof of income and employment.
With arrears based payments, you will receive the stage payment after the stage is completed. This is safer for the lender but may cause you cash flow difficulties unless you have sufficient funds of your own.
Advance stage payment scheme
With the Advance Stage scheme you receive your stage payment before you commence a stage. Due to the added risk to the lender, this type of mortgage is usually more expensive.
Most lenders offer the arrears based scheme although an increasing number now offer the advance payment scheme. If you have sufficient personal funds and/or a very understanding builder, you will generally find it cheaper to go for the arrears method as it should be cheaper.
How much can I borrow?
The amount that you can borrow with a self-build mortgage will depend on a variety of factors, including your credit history, income, and debt-to-income ratio. Lenders will also consider the value of the property you plan to build, the cost of construction materials and labour, and other related expenses when determining how much you can borrow.
Generally, self-build mortgages allow borrowers to borrow up to 95% of the total cost of building a new home. This includes the cost of purchasing a building plot, as well as the cost of construction materials and labour.
It’s important to note that self-build mortgages typically require borrowers to have a larger deposit than traditional mortgages, typically 15%-20% of the land and property value, as the lender is taking on more risk in financing the construction of a new home.
If you are considering a self-build mortgage, it’s a good idea to speak with multiple lenders to get a sense of how much you may be able to borrow. Each lender may have different lending criteria and loan terms, so it’s important to shop around and compare different options before committing.
Mortgage requirements and restrictions
Each lender will have some restrictions on the mortgage. These may include the following:
- If you intend to keep your existing mortgage, your lender will want to ensure that you have sufficient income to pay two mortgages.
- Some lenders will insist that all the building work is done by professional builders/contractors.
- Some lenders will restrict the types of materials you can use in your build so that your house is easy to re-sell.
- Lenders will usually insist that the self build is detached and is for owner occupation.
- Lenders will insist that the land has a minimum amount of planning consent remaining, for example two years.
- Lenders will insist that appropriate insurance is in place during the building work itself and that an appropriate warranty is obtained at the end of the build.
Other funding options
Not everyone wants, or needs a mortgage. You may be able to fund your build in other, cheaper ways. For example, if you already own a house with substantial equity, it may be cheaper to re-mortgage your house with a larger loan and use this to fund your self build. A re-mortgage on an existing property should always work out cheaper than a self build mortgage. You may also wish to consider selling your existing property and moving into rented accommodation or a caravan on site.