Embarking on a self-build project is an exciting journey that allows you to design and create your dream home from scratch. Unlike buying a ready-built property, building your own house gives you the flexibility to customise every detail to your taste and requirements. However, financing such a venture can be challenging. This is where a self-build mortgage comes into play.
In this article, we’ll explore what a self-build mortgage is, how it works, and whether it’s a suitable option for you.
What is a Self-Build Mortgage?
A self-build mortgage is a specialised type of loan designed for individuals who wish to build their own home. Unlike traditional mortgages, which are used to purchase an existing property, a self-build mortgage provides funds in stages as the construction progresses. This staged payment structure helps manage the cash flow and reduces the financial risk associated with large upfront costs.
Stages of a Self-Build Mortgage
- Purchase of Land: The first stage involves buying the plot of land on which you intend to build your home. The lender will release funds to cover the cost of the land purchase.
- Initial Construction: Funds are released to cover initial construction costs, such as site preparation, laying foundations, and basic structural work.
- Building Progress: Subsequent funds are released at various key stages of the build, such as completion of the roof, installation of windows and doors, and internal fixtures and fittings.
- Completion: The final stage of funding is released once the build is complete and the property is habitable.
How Does a Self-Build Mortgage Work?
A self-build mortgage works differently from a traditional mortgage in several key ways:
Staged Payments
As mentioned earlier, the loan is released in stages rather than as a lump sum. These stages are typically:
– Purchase of Land
– Completion of Foundations
– Building to Eaves Height
– Watertight Shell
– First Fix (plumbing and electrics)
– Second Fix (plastering and internal joinery)
– Completion
Each lender may have slightly different stages and criteria for releasing funds, so it’s important to clarify this with your chosen provider.
Valuation and Surveys
At each stage of the build, the lender will usually require a surveyor to inspect the property and confirm that the work has been completed to a satisfactory standard before releasing the next tranche of funds. This ensures that the project is progressing as planned and that the lender’s investment is secure.
Interest Rates
Interest rates on self-build mortgages can vary. During the construction phase, you might be on a higher interest rate as the risk is perceived to be higher. Once the build is complete, the mortgage may convert to a standard residential mortgage with potentially lower rates.
Repayment
You can opt for an interest-only mortgage during the build phase, which means you only pay the interest on the loan, not the capital. This can help manage cash flow during construction. Once the build is complete, the mortgage typically switches to a repayment mortgage where you pay both interest and capital.
Types of Self-Build Mortgages
There are two main types of self-build mortgages: arrears and advance.
Arrears
With an arrears self-build mortgage, the lender releases funds after each stage of the build is completed. This means you need to have some initial funds available to cover the early stages of construction.
Advance
An advance self-build mortgage provides funds at the start of each stage, which can help with cash flow and reduce the need for substantial upfront capital. However, advance mortgages can be harder to obtain and may come with higher interest rates.
Eligibility Criteria
Obtaining a self-build mortgage can be more complex than securing a traditional mortgage. Lenders will typically look for the following:
Good Credit History
A strong credit history is essential. Lenders need assurance that you are a reliable borrower.
Detailed Project Plan
You will need to provide a comprehensive plan for the build, including architectural drawings, planning permission, detailed costings, and a schedule of works. Lenders want to see that you have a clear and feasible plan in place.
Experienced Builder
Using a reputable and experienced builder or contractor can significantly improve your chances of securing a mortgage. Some lenders may even require it.
Deposit
A substantial deposit is usually required, often between 20% and 30% of the total cost (land plus construction costs). This deposit demonstrates your commitment to the project and reduces the lender’s risk.
Self-Build Insurance
Lenders will typically require you to have self-build insurance in place. This covers various risks associated with the construction process, such as damage to the site or materials, and public liability.
Advantages of a Self-Build Mortgage
Customisation
One of the biggest advantages of building your own home is the ability to customise every aspect of it. From the layout to the finishing touches, you have control over the design and functionality of your home.
Potential Savings
Building your own home can be more cost-effective than buying an equivalent property on the open market. You can often get more house for your money and avoid paying a premium for a developer’s profit margin.
Quality and Efficiency
You can ensure that your home is built to the highest standards and incorporates the latest energy-efficient technologies, which can save you money on utilities in the long run.
Personal Satisfaction
The sense of accomplishment and satisfaction from creating your own home is immense. It’s a unique experience that can be incredibly rewarding.
Disadvantages of a Self-Build Mortgage
Complexity
The process of securing a self-build mortgage and managing a construction project can be complex and time-consuming. It requires a significant amount of planning and coordination.
Financial Risk
There are inherent financial risks in self-building. Cost overruns, delays, and unforeseen problems can arise, potentially increasing the overall cost and timescale of the project.
Limited Lender Options
Not all mortgage lenders offer self-build mortgages, and those that do may have stringent criteria. This can limit your options and make it harder to find a suitable loan.
Stress
Managing a self-build project can be stressful, particularly if you encounter issues along the way. It requires a significant time commitment and resilience.
Can I Get a Self-Build Mortgage?
Whether you can get a self-build mortgage depends on several factors, including your financial situation, the viability of your project, and your choice of lender.
Here are some steps to improve your chances:
Improve Your Credit Score
Ensure your credit score is in good shape by paying off debts, avoiding missed payments, and correcting any errors on your credit report.
Save a Larger Deposit
The more substantial your deposit, the lower the lender’s risk. Aim to save as much as possible to increase your chances of approval.
Create a Detailed Plan
Prepare a thorough and realistic project plan, including all necessary permissions, costings, and timelines. This demonstrates to lenders that you are organised and prepared.
Choose the Right Builder
Select an experienced and reputable builder or contractor. This can reassure lenders that your project will be completed to a high standard.
Seek Professional Advice
Consider consulting with a mortgage advisor who specialises in self-build mortgages. They can guide you through the process and help you find the best deal.
Conclusion
A self-build mortgage can be an excellent way to finance the construction of your dream home. While the process can be more complex and challenging than obtaining a traditional mortgage, the rewards of creating a customised, high-quality home are well worth the effort. By understanding the requirements, planning meticulously, and seeking professional advice, you can increase your chances of successfully securing a self-build mortgage and turning your dream home into a reality.
If you’d like help with an Agreement in Principle (AIP), your mortgage application or protection products available, contact one of our friendly advisors who would be happy to have a chat and help guide you through it all.