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Self-build mortgages
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What is a self-build mortgage?
A self-build mortgage is for anyone who wants to build their own home, but doesn’t have all of the funds needed for their project. Standard residential mortgages are not suitable if you're looking for a mortgage to build a house, so this specialist product has been designed specifically to suit this need. Some mainstream lenders offer them, but most self-build mortgages in the UK are offered by building societies and more specialist lenders. Unlike a traditional mortgage, where you get the entire loan at the time of purchase, self-build finance is released in stages throughout the property building process.
How does a self-build mortgage work?
Some lenders will allow you to add on the cost of purchasing the land to your self-build mortgage, however, some will only lend to those who already own the building plot, so it’s important to ensure that you apply for the relevant product.
When you use a mortgage to build a house, the money is released in stages rather than all in one lump sum. This helps to pay for different aspects of the build as it progresses and stay on track with funding, but is also a safer for the lender, given that at the beginning of the mortgage, there is no property to secure their lending on.
As your home progresses through the various build stages, it becomes more valuable, and the lender can be confident to release the next stages of finance. To protect their investment, lenders like to be fairly involved in the project. You will usually need to provide them with detailed plans, building costs and evidence that you have qualified trades people and necessary planning permission.
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Differences between Self-build mortgages and traditional mortgages
There are a number of differences in the way that self-build mortgages differ from a traditional residential mortgages that would be used to buy a ready-built home, including:
The interest rates available
The maximum LTV you can borrow
The release of funds
The deposit requirement
Below we will look at each of these factors and how they differ from a residential mortgage in a little more detail.
Self-build mortgage rates
The interest rates are typically higher for a self-build mortgage than when you buy a pre-built house, as the lender is taking on more risk, and there is less competition in the market. Once the build is complete, however, it’s usually possible to remortgage onto a standard mortgage with cheaper rates.
How much can you borrow with a self-build mortgage?
As with any mortgage, this will depend on your personal affordability and credit score, however, the loan is calculated differently than when you buy a ready made home. Most lenders will allow you to borrow up to 75% of the total build cost, if you already own the land you intend to build on.
If you are using the self-build mortgage to purchase the land as well as complete the build, your borrowing may be worked out differently, as some lenders have maximum loan amounts that they will consider for different elements of the project, for example, land purchase, building costs and gross development value (the post-build value).
When are funds released during a self build mortgage?
Funds will be 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 the stages where funds are released are typically:
To buy the land (where necessary) - you will 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
Do I need a deposit for a self-build mortgage?
You will need a larger deposit for a self-build mortgage than a standard residential mortgage - usually 25%, but it can be more or less depending on the lender.
If you already own the land, it may be possible to use some of the value of the land to secure the borrowing for the build. Not all lenders offer this option, but a mortgage broker will be able to help you find one that does.
What types of self-build mortgages are available?
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.
How do you qualify for a self-build mortgage?
The criteria to qualify for a self-build mortgage personally are similar to those of a standard mortgage, and include meeting the affordability, credit, age and minimum deposit requirements of the lender. It’s worth considering that if you have to pay rent or ongoing mortgage payments to live elsewhere whilst the build is carried out, this will impact your affordability as the lender will include it as an outgoing.
Aside from this, however, 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 lender will consider:
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 qualifications of key members of the project team, such as the architect, surveyor and construction lead
Your properties compliance with building regulations
The accuracy of the 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 will release the funds
It can be easier to get certain self-build mortgages if you are building sustainable and energy efficient elements into the home, such as solar panels and high quality multi-glaze windows. With a gradual shift towards green homes, those planning ahead to accommodate future building requirements in this area may garner favour with certain lenders.
Which lenders offer self-build mortgages?
There are not a huge number of lenders currently offering self-build mortgages in the UK, so your best bet is to approach a broker to help you find the one that’s most suitable for your needs.
Some of the lenders offering self-build products include Bath Building Society, Buckinghamshire Building Society, Harpenden Building Society and Ecology Building Society*. There are also certain high street banks, such as Halifax, who offer this type of product, but you will typically only be able to access them through a broker.
*Please note that lenders can change their products at any time, this information was true at the time of writing.
What is the help to build scheme?
Launched in 2022, the Help to Build scheme was introduced by the government to help people wanting a self build loan to build their own home, but unable to meet the 25% deposit requirement.
It’s expected to be available for four years, however, the end date may be reduced or extended depending on demand.
The scheme provides a government equity loan of up to 20% of the estimated build cost (up to 40% in London) which is used alongside a self-build mortgage, in place of a deposit. You'll need to get a mortgage from a provider registered with the Help to Build scheme to qualify.
Advantages and disadvantages of a self-build mortgage
Building your own home means you can tailor it to your specific needs, so it may seem preferable to buying a pre-made home that you can’t choose the exact location and style of. That said, there are lots of considerations to taking on this size of project, so it’s important to be aware of the pros and cons involved with building your own home.
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
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
Claire FlynnAlthough self-build mortgages are a bit niche, there’s a surprising number of lenders you can use - both specialist and an increasing number of mainstream lenders too. ”
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