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Self-build mortgages

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What is a self-build mortgage?

A self-build mortgage is designed for anyone who wants to build their own home but who doesn’t have all the funds required to finance their project.

You can’t get a standard mortgage in these circumstances because they are reserved for homes that have already been built. Instead, you need a self-build mortgage where the money is released in stages as the property is built.

Self-build mortgages are available from specialist and more mainstream lenders – mostly building societies.

How does a self-build mortgage work?

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 paying for it with a lump sum at the start.

With a standard mortgage, you receive the money to fully complete the transaction in one go because the property already exists to act as security for the loan. With a self-build mortgage, your home hasn’t been built yet, so you receive the loan in instalments as the value of the property increases. This reduces the risk taken on by the lender.

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What types of self-build mortgages are available?

There are two types of self-build mortgages in the UK. They differ according to when the money is released: before or after a particular stage is completed. There are typically six stages, ranging from buying the land and laying the foundations to completion.

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 does a self-build deposit work?

As with a mortgage to buy an existing home, you’ll still need to put down a deposit when applying for a self-build mortgage. It’s possible to borrow up to 95% of the cost of the land and build with an advance mortgage, so you’ll need at least a 5% deposit, or 85% with an arrears mortgage, depending on the lender. Some will only lend you up to 75% or 80%.

As with a standard mortgage, the amount a lender will actually be willing to lend you depends on how much it thinks you can afford to pay back. You’ll also need to include detailed costings of your build to borrow the amount you need. The application process is likely to be more complex than for a standard mortgage.

Advantages of self-build mortgages

There are a range of advantages to building your own home with a self-build mortgage:

  • It can be cheaper to build your own home than buy an existing one

  • You’ll save on Stamp Duty as it only applies to the land you buy

  • You can create an energy-efficient home that meets your needs

  • Interest is only charged on the funds that have been released

  • You can switch to a mainstream mortgage once the build is complete

Disadvantages of self-build mortgages

There are also a number of downsides you need to consider when deciding whether to build your own home and take out a self-build mortgage:

  • You’ll need to pay for the first stage upfront if you take out an arrears mortgage

  • You need more paperwork to apply for a self-build mortgage, including plans

  • Planning permission to build your home on the land is needed in advance

  • You still need to pay for where you live while you’re building your home

  • Cash flow can be tricky if you don’t have plenty of savings you can use

Is a self-build mortgage right for you?

Searching for the right home for you, in the right location and at the right price can be a difficult endeavour. By building your own home you can tailor it to your needs now and for the future instead of having to modify it to suit you. And when completed, your home is likely to be worth more than it cost to build, giving you value for money.

Although the rewards can be great, to make it work you’ll need to do thorough research and planning and potentially go through a stressful build process, so think carefully about what’s involved before deciding whether it’s right for you.

Before you decide to go ahead, make sure you’ll be able to find a suitable plot and find out how easy it will be to get planning permission and how much the project will cost. Also, consider where you will live during the build and how much your living expenses will be. 

What else should I know about self-build mortgages?

How much building your home will cost you - and therefore how much you need to borrow with a self-build mortgage - will depend on how you go about it, so you should consider this at the outset to find out how much you’ll need to spend. 

There are generally three ways to go about it:

  • 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

  • You could manage the project and hire an architect, a surveyor and the builders, who will work for you to complete the self-built home

  • If you want to be completely hands-off, you could hire a contractor to manage the project from beginning to end, including hiring the necessary employees to carry out the job. This route is likely to be by far the most expensive option 

Claire Flynn - Senior Mortgages Editor at Uswitch
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Although 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. ”

Claire Flynn

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