As the name suggests, a self build mortgage is a home loan taken out on a property that you are building yourself. There is one pivotal difference between a mortgage for self build and a normal residential mortgage – with a self build mortgage, the money is released in stages as the build progresses, rather than in a lump sum like a residential mortgage. Typically these stages are at poignant benchmarks throughout the build, such as completion of foundations; completion of building up to eaves level; property being made watertight and windows installed; fixtures and plastering finished; and completion. In addition, it can also be arranged that the first sum goes towards the purchase of land, should you need a plot to build on.
The points at which monies are released will depend on the lender’s requirements, but typically there are five to seven stages. At each stage the lender will most likely instruct a valuer to inspect the property, to make sure everything is progressing as proposed.
With many lenders, money is released at the end of each specified build stage. However there are some lenders who will release the money required for each stage of the build at the beginning of that stage – this is particularly useful if you don't have the cash up front to pay your builders or to buy materials.
The reason that the money is released in stages is to protect the lender, but it also safeguards the borrower; it helps to ensure that the money is being spent as planned and that you’re not at risk of running out of money halfway through the project. The borrower will also only pay interest on the monies received – and not the total amount from the outset. In addition, inspections will help ensure that the work is being done to a standard that means the final property value will be as expected for all parties – important for the lender but also a real consideration for the owner/builder, as substandard workmanship could result in negative equity.
Why build your own home and get a self build mortgage?
There are some clear benefits to building your own home, however it’s no small task, and there are both advantages and challenges that you need to be aware of from the outset.
• Perhaps the most obvious advantage of building your own home is the ability to make it completely bespoke. Not only can you design the floor plan to fit your family and lifestyle, you can also choose to focus your funds in places that matter most to you, and/or will benefit you most in the long run – for example, on insulation
• Stamp duty savings – unlike buying an existing property, there are no stamp duty charges on the cost of the building work, or the value of the property once completed. Instead, stamp duty is only paid on the cost of the plot of land on which you build, and only if the cost of the land exceeds £125,000
• Self builders also benefit from VAT savings. VAT can be claimed back on labour and many material costs for new build houses
• As touched on above, building a house from scratch enables you to use eco-friendly materials and integrate energy-efficient systems from the start, which can provide huge savings in the long term. Make sure that you include these at the design stage, as retro-fitting is never as effective
• Often self builders find that the finished property is valued at more than it cost them to build
• Most lenders will need you to have planning permission already granted on your plot of land before you apply for a self build mortgage. This can take time to obtain
• As expected, the self build mortgage application is more complex than a normal residential mortgage, therefore it will likely take longer to be processed by the lender
• Mortgage rates for a self build mortgage are usually higher than a residential mortgage as there is greater risk to the lender
• There are usually numerous conditions placed upon self build mortgages by lenders to protect their risk
• Conditions of self build mortgages will vary from lender to lender, but generally will require each stage being signed off by the lender, and may require other stipulations such as use of certain materials or that the build is completed within a certain time frame.
It might seem daunting, but don’t be put off. Many people in numerous different situations successfully build their own home. In fact, those that might find it hardest to get a residential mortgage due to being priced out of the market in their area may find that self build is a viable solution. These people include first-time buyers, those in flats and inner city homes wanting more space, and retirees looking to downsize. A recent survey conducted by the National Custom & Self Build Association (NaCSBA) and Ipswich Building Society, found that one in eight (12%) of Brits (around 6 million people) will research how to build a home for themselves within the next 12 months; this is a slight decrease from 2014 (14%) but remains stable with 2013.
The poll also suggested that around one in 50 expect to buy a building plot, obtain planning consent or start construction work on their own new home during the coming year or so.
How can I get a self build mortgage?
As outlined above, lenders will likely require that you have certain things in place before you make a self build mortgage application. These include:
Finding a suitable plot of land
Obtaining planning permission
Have detailed plans of the property drawn up
A realistic projection of costs
Have deposit saved / put aside – the percentage will depend on the lender
Of course, criteria will vary between lenders and may include considerations such as building regulations.
Top tips for those thinking of building their own home
Lenders will only lend a percentage of the full land and/or house value, meaning you will still probably need a sizeable deposit. As a general rule, this deposit will be at least 25 per cent, although you might be required to put down as much as 50 per cent, depending on the lender
On top of this deposit, you will need to make sure you have somewhere to stay during the project. Whether this is with friends or relatives, in a house you already own or rent, or in a caravan on site, you will need to have the funds to pay for alternative accommodation while your new property is being built. It’s a good idea to build in a contingency budget of around 10 per cent to cover the cost of any unexpected expenses during the build
Don’t dismiss plots where a property already stands – sometimes it can be cheaper to knock down an existing property and rebuild a new one than to buy an existing property to the requirements you’re looking for
Don’t presume that you need to be on site all the time as project manager, or need to do any construction work yourself – unless you feel confident in doing so. Although it will add a cost to the project, if you are a novice or first time self builder then hiring professionals may be the best option. Making sure you budget for this from the outset will increase your chances of the project going smoothly from the outset, and staying on track with budget
Whilst it may seem daunting, self build doesn’t have to be. Remember to have a clear plan, and talk to professionals, particularly when it comes to design, build and finance. Building societies, such as Ipswich, can often provide the best options for self build mortgages, thanks to our manual underwriting and considering every mortgage application on its own merits. For more information please see our self build mortgage page, our Right to Build page or speak to one of our advisors.