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Is a self build project right for you?

Searching for the right home for you, in the right location, and at the right price can be a long and painful endeavour.

For many of us, being able to build our own home would be the dream. That way we could tailor it to our needs now and for the future instead of having to constantly modify it over the years.

If you choose to go down the self build route of owning a house, then you will most likely need a self build mortgage to finance your dream self built home.

When deciding to self build a home, there are generally three ways to go about it, or some kind of combination of all three.

Firstly, you could choose to do all of it yourself, especially if you're quite handy with building and construction – possibly only hiring electricians and plumbers along the way as and when it becomes necessary.

Secondly, you could instead simply manage the project and hire an architect, a surveyor and the builders, who will work for you to complete the self built home.

Lastly, if you want to be completely hands-off, you could hire a contractor to manage the project, and hire the necessary employees to carry out the job, from beginning to end, although this route is likely to be more expensive.

Can you get a mortgage to build a house?

Unless you have a huge amount of cash sitting in the bank, you are likely to need a mortgage. However, you will not be able to get a standard mortgage, which are normally reserved for residential properties that have already been built. There are specific types of mortgage to build a house.

If you decide that a self build is right for you, you will need to get a self build mortgage provided by a specialist mortgage lender.

What is a self build mortgage?

Self build mortgages, as the name suggests, are mortgages that finance your project to build your own home.

Self build mortgages allow you to borrow money to first buy the land you want to build on, then, money is released in stages so you can pay for the build as it progresses rather than as a single lump sum amount at the start.

With a standard mortgage you will receive the money to fully complete the transaction in one go. However, with a self build mortgage, you receive the loan in installments. This is to reduce the risk taken on by the lender, as many things can go wrong on a huge project like building your own home.

For example, extra unforeseen costs may arise in the plumbing or electrician work, builders may mess up the job or leave parts unfinished, and certain materials may end up costing more than initially expected.

Generally speaking, the way it works is that the first loan payment on a self build mortgage goes towards paying for the land you want to build on. You will get extra once the foundations have been laid, and more once the property has been built up to the point where the roof comes in.

The last couple of payments come in when the roof has been built and sealed, when the interior walls have been plastered, and finally when the entire home has been completely built.

How do self build mortgages work?

In your application you will need to provide a plan for how you will go about building your own home. This should be done in a way to give the self build mortgage provider a strong enough sense in how the project will proceed and confidence that their money is in safe hands and can be repaid without problem.

At every stage of a self build mortgage payment going out to you and your project, a property valuer will usually visit the building site to check the work has been completed and is on track with the project plan.

There are two types of self build mortgages in the UK to choose between. The first type is an arrears mortgage, where usually the money is released after a stage of the self build project has been completed, so the bulk of the risk normally lies with you.

However, there is another type of self build mortgage known as an advance mortgage. With advance payment self build mortgages, the lenders provide the money at the beginning of each stage, so you can provide cash upfront to buy the materials and hire the required workers in advance.

Self build mortgage deposits

As with other home purchases, you will still need a mortgage if you're planning a self build.

However, the deposit amount you'll need to provide is likely to be more than a standard mortgage. Alongside your planning permission and plans, you will need to include projected costs for the project when you apply for the mortgage.

Lenders will typically be cautious when it comes to a self build project, so it's important to be as prepared financially as possible. You can do this by ensuring you have a good credit report, and a reasonable deposit amount saved.

The disadvantages of self build mortgages

With a standard mortgage you could put down a deposit of around 10% to 20%, but with a self build mortgage, you need to put up more of the cash up front. That means you would need around at least 25% of the cost in the form of a mortgage deposit, so use a self build mortgage calculator to work out the costs ahead of time. In some cases you will need up to 50% for a self build mortgage deposit.

As you might have guessed, self build mortgages generally require more paperwork than a standard mortgage. After all, you need to provide plans of how you are going to build your own home, what financing you will need at every stage of the process, and estimates of the final costs.

Most self build mortgage lenders will also need to see proof that planning permission has been granted, so in many cases you will need to have already completed some paperwork with the local planning authorities (LPA) before even getting to the mortgage application stage.

Lastly, you will still have running costs where you currently live while undertaking a project to build your new home. So remember, that you will need enough money in the bank and income to help cover your everyday living expenses and your self build mortgage repayments.

Advantages of a self build mortgage

Although you will generally need a large deposit of around 25% up to around 50% of the total self build mortgage, it can often work out much cheaper to build your own home if you have planned it carefully.

The materials and labour may seem costly to begin with, but many self build homeowners tend to find that their property's value upon completion turns out to be a lot higher than it cost to build in the first place.

You may also find that the amount of money you need for a self build mortgage is lower than the mortgage you might have asked for if you were buying something ready made on the housing market.

With self built properties, you only owe stamp duty on the land you paid to build on. This means many self build homeowners avoid paying stamp duty, which can save them thousands of pounds.

Before you compare self build mortgages, do your research on the land, if it'll be difficult to get planning permission, how much the project will work out at every stage, and how you will afford to continue living where you are while paying off the self build mortgage.

Make allowances for extra costs coming up in your project so that you have a more conservative estimate in your plans. That way, if mistakes do happen and additional costs do arise, then hopefully you will still be able to handle it and follow through with building your dream home.

Finding the best self build mortgage rates

As with all mortgages, the amount you can borrow will depend on your financial situation. However, it’s important to note that compared to standard residential mortgages and remortgages, self build mortgages usually have a higher rate of interest on them. Once the build is complete, you may be able to switch to a lower interest rate, depending on your lender and mortgage terms.

It makes sense to plan your self build home project carefully and to do your research beforehand, as it could improve your chances of getting a better self build mortgage deal. Keep in mind that many lenders will insist that you build a minimum contingency amount into your build cost estimate.

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