Have you always dreamed of building your own home? Creating a property that matches your individual requirements and your plans and vision for the future?
There are some very practical advantages too. You can save a lot of money, and you can also create a home which is eco-friendly and costs less to run.
Maybe your plans are already in hand, and you’re thinking about how you will finance the project. Self build mortgages are a real thing, but they can be more difficult to find and secure.
Advantages of working with a specialist Self-Build mortgage broker
It will be more complex to secure the right mortgage deal on a self build property, so it’s definitely worth consulting a specialist mortgage broker.
An specialist mortgage advisor will have access to comprehensive panel of mortgage products and schemes. They’ll be able to work for you, securing the right deal to match your personal circumstances.
Mortgage brokers are qualified professionals, regulated by a defined code of conduct. You can be sure your advisor will have your best interests at heart.
In addition, if you’re self-employed or have a bad credit history, your broker will be able to access specialist lenders on your behalf, aside from the traditional high street or mainstream providers
Specialist mortgage brokers can help you with a broader range of financial services such as life insurance and income protection, putting together a portfolio to match your needs. Talk to us at Mortgage360 – we’ll put together a package designed around your needs and provide you with specialised self-build mortgage advice to suit your budget.
Types of mortgages available for Self-Build projects
A self-build mortgage is different from a conventional mortgage. Rather than paying a lump sum to cover the entire cost of a property, they release funds in stages, essentially creating the cash flow you need to finance the building of your property in terms of materials and labour.
Broadly speaking, there are two types of self-build mortgages
An advance self-build mortgage is designed for people who don’t have cash in hand to finance the project. This type of mortgage releases funds at the start of each building phase.
Some mortgage lenders will only lend on the build, rather than the land. Interest rates on advance mortgages are typically higher than other types of mortgages.
If, on the other hand, you do have your own funding for some of your self-build costs, then the arrears mortgage will probably be a better route for you. Arrears mortgages release funds after the completion of each stage, so you fund the stage and then receive the money afterwards.
– Other Options
If you own a home already and have sufficient equity in it, then your other options are to remortgage or take out a bridging loan to fund your self-build. Once the project is complete, you can sell the original property and pay this off. Interest rates on bridging loans make this a more expensive option, and bridging finance will usually have a maximum twelve-month term, so you have to be confident you can complete your build within this space of time.
Advantages of Self-Build Mortgages
Self-build gives you a unique opportunity to create your own home, designed around your needs, exactly how and where you want it to be.
It will almost certainly cost you less than buying a comparable property, and will probably be significantly more valuable than the total of the money you have spent on land, labour, building materials and professional fees.
You will only pay stamp duty on the cost of the plot of land, not on the remainder of your self-build costs, and even then only if the plot of land costs more than £250,000 (until 31 March 2025).
Disadvantages of Self-Build Mortgages
It will be more expensive than a conventional residential mortgage, although you will probably be borrowing less in total than you would if buying a comparable existing property. Self-build mortgages typically attract higher interest rates to mitigate what is perceived as a higher level of risk, as well as higher arrangement fees.
You will also have to find a larger deposit for a self-build mortgage, probably around 25% of the total projected cost, but for some lenders, this may be higher.
Money will only be released in stages (or tranches) to protect the lender in the event of issues arising.
You will need to provide your lender with full documentation on the proposed self-build, including floorplans, detailed costings, site insurance, a suitable warranty and project completion timelines.
The funding stages
Exactly how and when funds are released will vary from lender to lender. Funding is released in stages to minimise risk for the lender. If you fail to complete the project for any reason, there will be tangible assets to cover the funds already advanced.
Build stages usually need to be signed off by a surveyor. Typical staging (for brick/block and timber frame systems) is as follows;
- Funds released for land purchase
- At substructure stage (foundations)
- Built to eaves height
- Roofed (wind and watertight)
- First fix (structural work)
- Second fix (finishing work)
A contingency fund
Don’t expect everything to run smoothly! Unexpected issues and delays will almost certainly crop up, so it’s advisable to allow for 15% of your total build costs as a contingency fund to avoid having to secure extra funding, with additional costs.
Applying for a Self-Build Mortgage
In addition to all the standard mortgage application requirements, your self-build mortgage will require a number of additional aspects, including;
- Your ability to demonstrate to lenders that your project is feasible, carefully planned and professionally managed
- Detailed projections covering costs and timelines
- Planning permission
- Documentation including floorplans etc
A self-build mortgage can be a great tool for helping you achieve your dream home at an affordable cost.
Remember you will need to live somewhere while the build is being completed, and the costs involved here will be taken into account when your mortgage lender is assessing your overall affordability.
What deposit is required for a self-build mortgage?
The deposit will typically be larger than for a standard residential mortgage. There may be separate considerations for buying the land and actually building the property.
As an example, a 75% LTV (Loan to Value) might be set on the land purchase, and an 85% LTV on the build costs.
A typical deposit would be around 25% of the total projected cost. This figure may also be impacted by your assessed affordability and credit history.
Assessing Your Financial Circumstances and Credit History
Everyone seeking a mortgage needs to satisfy the lender’s affordability checks. Lenders will look closely at your income, outgoings and any existing debts, as well as your credit history.
Specialist lenders may be more flexible in terms of allowing bonuses and commissions to be taken into account.
Assessing the Building Project and Labour Costs
It’s possible for building costs to quickly spiral out of control, so you’ll need to set a budget by working out the proposed costs.
Research your costs carefully – they should include everything from planning permission to architects and other professional fees. Remember your final fixtures and fittings.
Assess your finances carefully and decide whether this financial commitment is for you. Remember you’ll need to live somewhere while you build!
Don’t just go for the cheapest quotes, look for testimonials. Always pay in instalments.
Calculating Affordability and Gaining Approval for Funds
Alongside the mandatory affordability checks, gaining approval for a self-build mortgage will also be dependent upon your design and construction methods being compliant with Building Regulations. Some lenders may be unwilling to lend on some construction systems.
Some lenders will require the build costs to be calculated by a qualified quantity surveyor, whilst others will work on a fixed build cost budget.
Other requirements will include;
- Detailed planning permission
- Architects drawings
- Insurance and structural warranties
- Energy performance calculations (SAP)
- A valuation of the proposed self-build
Why Choose Mortgage360 as your Self-Build Mortgage Broker?
At Mortgage360, we understand the trials and tribulations of building your own home. We know which lenders offer competitive deals. We’ll get to know you and your personal circumstances in order to advise you on the best route forward to secure a mortgage deal for your dream self build home! Contact us to start the ball rolling.