This article is for anyone considering building their own home and wondering how self build mortgages work.
Traditional mortgages aren’t designed for self build projects. If you think about it, constructing a home from the ground up is very different from finding a property on Rightmove and moving in a few months later.
Building your own home is a really exciting journey, and a self build mortgage is designed to help you through each step. It helps to make sure the finished house meets all the required building regulations.
Do you need a deposit for a self build mortgage?
It depends on what stage you are currently at. If you are looking to purchase a new plot you will need a deposit for a self build mortgage. The larger the deposit you can save, the better. Typically, most lenders ask for around 20 to 30 per cent as a minimum. If you are lucky enough to already own your plot, you won’t need a further deposit when applying for a self build mortgage. The value in the land will effectively provide your ‘deposit’.
What does a self build mortgage cover?
Self build mortgages aren’t just for brand-new homes, they can also cover part-built projects, conversions, large-scale renovations, and knockdown-and-rebuilds. As a rule of thumb, if a property can’t be lived in or if major structural work is needed, you’ll need a self build mortgage instead of a standard one.
If you are using a self build mortgage to buy a plot of land your lender will expect to see detailed plans of your proposed property before they provide the funding. They will also want to be certain that planning permission has been granted. They won’t lend if your project isn’t fully thought through and costed. Some lenders will also set deadlines for when the build must start and finish.
The difference between a self build mortgage and a standard residential mortgage.
When you buy a house the ‘normal’ way, on the day of completion, your mortgage lender sends all of the funds to your solicitor. They then transfer the funds to the seller’s solicitor to pay for your new home.
However, with a self build mortgage, the lender only releases some of the money to your solicitor. If you are purchasing a plot, the funds for the purchase will be sent to the seller’s solicitor to pay for the plot. You’ll generally need enough of your own funds available to then start the build before more funds are released in stages.
What are the normal ‘stages’ in a self build?
These are normally tied to construction milestones like buying the land, digging foundations, getting the walls up to first-floor height, making the house watertight, and so on. The exact stages depend on how complex your build is. Most lenders will tell you at which stages they’re willing to release each chunk of money.
Some will have predefined stages and others, like us, are more flexible.
What exactly are stage payments?
Most lenders pay you after each stage is completed. This is known as an arrears-style mortgage. This means you have to cover the costs upfront, and they release money once that part of the build is done and can be valued.
With an arrears-style mortgage it’s important to ensure you have enough of your own funds to cover the deposit as well as start the build when purchasing the plot with your mortgage.
However, if you are securing your self build mortgage against a plot you already own, even with an arrears-style mortgage you will be able to raise funds to start the build. This is because the first stage will be released against the plot, rather than being used to purchase the plot.
With advance payments, however, the lender gives you the money before each stage begins. Because the work hasn’t been done yet, there’s no security for the lender, so fewer lenders offer this latter option and interest rates tend to be higher than for arrears-style mortgages.
Before releasing more funds, the lender will need a certified valuer to check and sign off each completed stage. The self builder typically pays a small fee for this each time. The lender will provide a list of the professionals that it has pre-approved to value the property at each stage.
Borrowing in stages is actually a really good thing for self builders! If you’re approved to borrow £700k overall but only need £120k at the beginning of the project to buy the land, you’ll only pay interest on that £120k. When you take the next chunk, say £50k for groundworks, your interest is then based on £170k (£120k plus £50k). This reduces the total amount of interest you’ll pay in the long run. It also helps to keep the cost of your mortgage payments down during the early stages of the build, when you can have some of your biggest expenses.
Why do lenders care about the quality of the build if it’s my property?
There are two main reasons and both are linked to protecting their money. If you can’t finish the build because of money issues, stress, illness or other life events, the lender may need to step in. They’ll have to value and sell the unfinished property to recover the mortgage. If the build quality is good, everyone can settle up quickly and move on.
Contingency planning.
Self build projects often hit unexpected problems such as bad weather, delays with contractors, groundwork issues and fluctuations of the price of building materials. So, before they agree to lend, mortgage providers will want to see that you have a contingency plan to cover anything that might go wrong. Most project managers will suggest a contingency of around 15-20% of the total build cost.
They’ll also want to know how you’ll pay for somewhere to live during the build, whether that’s renting, staying with family, or buying a static caravan to stay on site.
When planning your budget, it’s always best to be cautious. It keeps your project on track, shows the lender you’ve thought everything through and that you’ll handle the money they are lending to you responsibly.
A self build can be an extremely rewarding route to having your dream home. Because every project is unique, it’s important to work with a lender who can assess your plans individually and support you in achieving your goals.
