- Uswitch.com>
- Mortgage comparison>
- Compare Self-Build Mortgages | Uswitch
Self-build mortgage
Our guide shows you all you need to know about self-build mortgages, including how to compare the best self-build mortgage rates
What is a self-build mortgage?
A self-build mortgage is for anyone who wants to build their own home, but doesn’t have the funds needed. Standard residential mortgages are not suitable if you want a mortgage to build a house, and this specialist product is designed specifically to suit this need. Most self-build mortgages in the UK are offered by building societies and specialist lenders, although a few mainstream lenders, such as Halifax offer them.
Unlike traditional mortgage loans, self-build finance is released in stages throughout the property building process. This is because your home progresses becomes more valuable the further into the build it is, giving the lender more confidence to release the next chunk of money.
Some lenders allow you to add the cost of buying land to your self-build mortgage, but some only lend to those who already own a building plot. You could also look at land mortgages to purchase development land.
How much can I borrow with a self-build mortgage?
Your personal affordability and credit score play a role in the loan size, but it's calculated differently than for a ready made home.
Most lenders offer up to 75% of the total build cost, if you already own the land you intend to build on. This means you'll need around 25% deposit, although the help-to-build scheme may provide a government equity loan for up to 20% of the deposit cost if you qualify.
If you're using the self-build mortgage to purchase the land as well as complete the build, borrowing is likely to be calculated differently.
Those lenders offering self-build mortgages usually provide a specific self-build mortgage calculator - this should give you a good idea. However, it's often best to speak to an experienced broker with specialist mortgage products like this.
Eligibility criteria for self-build mortgages
Self-build mortgage criteria are similar to a standard mortgage when it comes to personally qualifying, such as affordability, creditworthiness, age and deposit.
In addition to personal criteria, the lender will base their decision largely on the feasibility of the building project. This means that your plans will have to meet their idea of a low-risk property with strong resale potential:
The location/suitability of the plot of land
Planning permission potential (if not already secured)
The design and functionality of the property
The type of construction system to be used
The professional qualifications of key members of the project team, such as the architect, surveyor and construction lead
Compliance with building regulations
The accuracy of estimated building costs - potentially including a contingency fund
Some lenders may also expect you to have a 10-year structural warranty policy in place and renovation insurance policy before they release funds
It can be easier to get certain self-build mortgages if you're building sustainable and energy efficient elements into the home. As the industry slowly shifts towards green homes, implementing solar panels, high quality multi-glaze windows and elements that consider future building standards can add appeal for lenders.
Types of self-build mortgages
There are two types of self-build mortgages in the UK, and the only difference between them is when the funds are released:
Self-build arrears mortgage
A self-build arrears mortgage is where the money is released after each stage of the self-build project has been completed. This means the bulk of the risk lies with you as you’ll need to fund each stage yourself before being reimbursed by the lender. Cash flow could be tricker with this option.
Self-build arrears mortgages can be cost-based, where the money released is based on what you’ve spent, or value-based, where a surveyor values the property at each stage.
Self-build advance mortgage
The other type of self-build mortgage is an advance mortgage. This is where the lender releases an agreed amount at the beginning of each stage, giving you cash upfront to buy the materials and hire workers.
An advance mortgage could suit you if you don’t have the cash available to start the project. However, you should expect to pay a higher interest rate than with an arrears mortgage as they’re riskier for the lender.
When are funds released during a self build mortgage?
Funds are released either before or after specific stages of the project, depending on the type of self-build mortgage you have. There can be some variation from one lender to the next, but funds are released are typically:
To buy the land (where necessary) - you'll need an absolute minimum of outline planning permission for this
Preliminary costs including laying the foundations and the substructure
Installing the wall plate/eaves height or erecting the timber frame - the stage just before the roof is fitted
When the property is wind and watertight with roof tiles and windows etc
First fix and plastering
Second fix
Certified completion
Advantages of self-build mortgages
It can be cheaper to build your own home than to buy an existing one
You’ll save on stamp duty as this is only due on the land you buy, not the final cost of the home you build
You can create an energy-efficient home that meets your needs
Interest is only charged on the funds that have been released meaning you won’t pay interest on the full loan from the outset
You can switch to a mainstream mortgage once the build is complete to access cheaper interest rates
Disadvantages of self-build mortgages
Interest rates are typically higher than for residential mortgages
You may need to purchase the land before you can get a self-build mortgage, depending on the lender criteria
If you use an arrears mortgage you’ll need to find the money to finance each stage of the build before you start
There is significant input from the lender with regards to your plans and building costs, so you may need to make compromises
You'll need to seek planning permission, which is not always straightforward and can be rejected
You may need to pay for somewhere to live while you’re building your home unless you are able to stay with relatives etc. If you have to pay rent for this temporary accommodation, the lender is likely to consider this in their loan calculations
There is less choice available in this niche, so it can be harder to find a self-build mortgage to suit your needs
You won’t usually get the final stage of funding until the project is complete
Differences between self-build mortgages and traditional mortgages
When you get a mortgage to build a house, there are some significant differences to a traditional residential mortgage. For example:
Interest rates - these are normally a bit higher, but once the build is complete, you may be able to remortgage to a cheaper deal
Maximum LTV - you can normally borrow a bit less with a self-build mortgage, usually up to 75% of the build cost
Release of funds - funds are released throughout different stages of the build, rather than all at once - which is the case with a traditional mortgage
Deposit - you usually require a larger deposit for a self-build mortgage (typically 25% but it can be more or less)
Although self-build mortgages are a niche product, a surprising number of lenders offer them. There are some very specific criteria involved with this type of mortgage, so it's a good idea to seek out expert advice before you choose a deal”Kellie Steed, Mortgage Content Writer
