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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.Can I build my own home?
Searching for the right home, 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. It’s why so many of us watch programmes like Grand Designs on Channel 4. Building our own home means 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, 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.
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
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. These 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.
Self build mortgages, as the name suggests, are mortgages that finance our 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.
Building projects have a habit of going over budget: extra unforeseen costs may arise in the plumbing or electrician work, for example. Builders may also 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 to the point where it can be roofed.
The last couple of payments come in when the roof has been built and sealed and when the interior walls have been plastered. Then finally when the entire home has been finished.
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 of how the project will proceed and the confidence that their money is in safe hands and can be repaid without problem.
Generally, at each stage when payments are due, a property valuer will visit the building site to check that the necessary work has been completed and that the project is still on track.
There are two types of self build mortgages in the UK.
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.
The other type of self build mortgage is known as an advance mortgage. With advance payment self build mortgages, the lenders provide the money at the beginning of each stage, giving you cash upfront to buy the materials and hire the required workers.
If you have a large amount of cash to start the project then an arrears type self build mortgage may be the best option. A self build arrears mortgage offers payments in stages after each stage is complete. This means you spend your money and are then reimbursed.
This is for those who need regular amounts of money in order to fund each stage of the building project. An advance mortgage releases payments at the start of each stage. This is a good option to help with cash flow but expect to pay a higher rate of interest than with an arrears type mortgage.
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.
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.
Although you will generally need a large deposit (around 25%–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 thousands of pounds.
Before you compare self build mortgages, do your research on the land. Find out how easyit will be to get planning permission, how much the project will cost at each stage, and how you will afford to continue living where you are while paying off the self build mortgage.
Make allowances for extra costs cropping up during your project. That way, if mistakes do happen or additional costs arise, you have more chance of being able to handle them and follow through with building your dream home.
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 attract a higher rate of interest. 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 carefully and to do plenty of research beforehand. Evidence of this 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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