Self-Build Mortgages: How do they work?

Building a house

If you’ve always wanted to build your own home but you’ve never quite known how to go about it in terms of mortgages, you’ve come to the right place. If you’re going to build your own home, instead of requiring a traditional mortgage, you will need a specialist self-build mortgage if you’re not able to pay for the land and all the building costs in cash.

Whether you want to know more about how to get a self-build mortgage if you already own land or you just want some advice on the eligibility criteria for a mortgage for self-build purposes, we’ve covered everything you need to know about self-build mortgage rates and self-build mortgage brokers below.

What are ‘self-build mortgages’ and how do they work?

A self-build mortgage is designed for people looking for finance to build their own home. Whether you’re doing most of the hard work yourself and only hire tradespeople as and when you need them, or you’re going to hire an architect and a whole team of builders to take care of everything for you, you will need a self-build mortgage if you cannot finance the project yourself.

A mortgage for self-build purposes is a loan that you take out to fund the costs of building a property yourself. Unlike a regular mortgage where you borrow money to buy the house and then pay your mortgage off every month for many years, a self-build mortgage is used to fund the actual building stages of the house. 

It also differs from a regular, residential mortgage as you receive the money in stages during parts of the build, rather than as a lump sum as you normally would when buying a house. Lenders do this to reduce the risk of lending you such a large amount of money so that they can keep an eye on what you’re spending the money on for the build so you don’t run out before the project is even completed.

The money is paid in instalments to you at various stages of the building process, so funds may be released when you buy the land, when you’ve laid the foundations, when the roof is on and when the walls have been plastered. The final payment is usually made when the build is complete and then like a regular mortgage, you will have to pay it back in instalments every month.

Types of self-build mortgages

There are two types of self-build mortgages that you can look into if you want to build your own home.

  • Advance - An advance self-build mortgage is usually intended for those with less money to fund the building of their house. It helps with cash flow issues as the money is made available at the beginning of each stage of the build so that it’s available to pay bills and labour costs.
  • Arrears - An arrears self-build mortgage is the more common one of the two and payments are made after each stage of the build, so it’s ideal for people who have a bit more cash to work with.

What do you need for a self-build mortgage?

Applying for any kind of mortgage will take a lot of time, effort and paperwork and an application for a self-build mortgage also requires additional paperwork as well. When you make an application with a lender, they will likely want to see the following documents:

  • Drawings and specifications of the intended construction of your self-build home.
  • Proof that planning permission has been granted.
  • Approval of Buildings Regulations.
  • Proof of your architect’s professional indemnity insurance.
  • Proof of site insurance and structural warranty.

Some lenders will also want to see a projection of the costs involved in the project. This doesn’t have to be exact as costs can change all the time depending on different circumstances, but it’s a good idea to have a rough expectation.

How much money can I borrow when getting a self-build mortgage?

It depends on which type of self-build mortgage you get as to how much money you can borrow.

With an advance stage self-build mortgage, you can usually borrow up to 95% of the cost of your plot and 95% of the cost of the build, whereas you can only borrow up to 85% of the costs associated with an arrears mortgage.

Do I need a good credit score for a self-build mortgage?

The exact credit score you need for a self-build mortgage depends on the lender, but you can usually expect to need a good score to be accepted for this type of mortgage.

What size deposit do I need to apply for a self-build mortgage?

You will usually be required to put at least 25% of the total project deposit down with a self-build mortgage, but some lenders may even require 50%.

Do you need planning permission to apply for a self-build mortgage?

You will most likely have to show proof of planning permission when you apply for a self-build mortgage, so make sure you’ve done this before you start your application.

The advantages of self-build mortgages

There are several advantages of self-build mortgages, including:

  • You can potentially save thousands of pounds on stamp duty as you only have to pay stamp duty on the value of the land itself if it exceeds £125,000, so you don’t pay it on the cost of building work or the value of the property once it’s completed.
  • The value of a self-build property is also often much higher than the total cost of building the house altogether, so you can usually always make a profit.

The best self-build mortgage providers

Getting a self-build mortgage can be a little harder to obtain than a traditional mortgage because they just aren’t as common and therefore, not as many lenders offer them. If a self-build mortgage is what you need, take a look at some of the top providers in the UK below.

  • Saffron Building Society
  • Ipswich Building Society
  • The Melton Building Society
  • Scottish Building Society
  • Loughborough BS

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