Self-build Mortgage: Everything You Need to Know
If you want to build your own home, it comes with many challenges. You’ll need to design the property, source skilled professionals for the build, and manage a major project. On top of this, you also have to find the money you need to pay for the build.
This is where a self-build mortgages comes in. But what is a self-build mortgage? How does a self-build mortgage work? And what are the main advantages of a self-build mortgage? Keep reading for answers to these questions and more.
What is a self-build mortgage?
A self-build mortgage is a mortgage that you take out on a brand new property that you are building yourself.
The main difference between a self-build mortgage and a traditional home loan is that you will receive the money you need in stages, rather than as one lump sum when you complete on your purchase.
By releasing your money in stages, it reduces the lender’s risk and ensures the cash you need for the build is spent as planned. It also helps you to ensure that you don’t run out of money part way through the build.
You normally receive the money in several stages, from buying the land through to completion (see below).
What types of self-build mortgage are available?
Typically, there are two types of self-build mortgage depending on the way that you will pay for your project:
- An ‘arrears’ self-build mortgage – here, your staged payments are released as each stage of the build is completed.
- An ‘advance’ self-build mortgage – here, your staged payments are released at the start of each stage of the build.
If you have a pot of your own cash that you can put into the project, then the ‘arrears’ route may be more suitable for you. It’s ideal if you have sufficient savings to fund the early stages of the build and the deposit on the land. Or, maybe you have sold your existing house and you have cash available to get the property build under way?
However, if you need the money to complete each stage of the build then you may need to consider the ‘advance’ option.
The ‘advance’ option is ideal if you have only a small amount of cash available and you don’t want to sell your existing house to release equity before your new one is completed. It is also a good choice if you want to keep the money you have available until later in the project to maintain a contingency fund.
What documents do I need for a self-build mortgage?
The requirements for a self-build mortgage will depend on the lender that you choose. Typically, you will need:
- A site map showing where the property will be built
- Valid unrestricted planning permission
- House plans showing the layout and size of the house
- The usual documentation required for a mortgage: ID, proof of income and outgoings, budget planner and bank statements. You will need to evidence that the loan is affordable to you.
How to put yourself in the best position when applying for a mortgage
How does a self-build mortgage work?
The main difference between a self-build mortgage and a traditional home loan is that you will receive the mortgage money in stages, rather than as a lump sum.
While every self-build project is different, most share the same key stages of progress:
- Stage 1 – Purchase of land
- Stage 2 – Preliminary build costs and foundations
- Stage 3 – Wall plate level, or the erection of a timber frame kit
- Stage 4 – Property is wind and watertight
- Stage 5 – First fix and plastering
- Stage 6 – Second fix to completion
Under an ‘arrears’ self-build mortgage, your lender will release between 50% and 85% of the purchase price or value of the land to enable you to buy the plot.
The lender will then release the rest of the loan in instalments linked to the stages above. The money for each stage is released when a valuer visits the project and confirms that the work has been completed.
Under an ‘advance’ basis, money is released at the beginning of each stage of the build to enable you to buy materials and to pay your builder for the work. Some lenders will advance up to 95% of the cost of the land and up to 95% of the cost of the build.
What are the advantages of self-build mortgages?
One of the advantages of building your own home using a self-build mortgage is that there is no stamp duty on the cost of the building work, or the value of the property once the work has been completed. This means that you could save yourself thousands of pounds in stamp duty.
You only have to pay duty on the cost of the plot of land itself if the cost exceeds £125,000.
Another advantage of building your own home is that the finished property can often be worth much more than it cost to build.
How much does a self-build mortgage cost?
Self-build mortgage rates are typically slightly more expensive than traditional mortgage rates.
You will have a choice of fixed-rate and variable-rate deals depending which lender you choose. Rates will also depend on whether you take an ‘advance’ or an ‘arrears’ deal, how much you want to borrow, and the loan-to-value.
Rates range from around 4-6%, depending on the factors above.
If you’re buying a new-build property, the process is slightly different. Find out more in our guide to new build mortgages.