Self-Build Mortgages: Everything You Need to Know

Securing funding is a critical step for both new and experienced self-builders to successfully complete their projects. Some of the funding will likely be sourced through a self-build mortgage.

Organising finances is a crucial initial step for individuals embarking on a self-build project. Self-build mortgages differ from traditional mortgages used for house purchases, as the funds are released in stages during the building process.

There are multiple options available for accessing funds, with product selection depending on individual circumstances. Starting communication with your mortgage broker and bank early in your project is recommended to explore all available options.

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There are two types of self build mortgages available for you to choose from

What is the maximum loan amount for a self-build mortgage?

What are the eligibility requirements for a self-build mortgage?

How can I obtain a self-build mortgage?

Is the ‘Help to Build’ scheme beneficial for obtaining a self-build mortgage?

What are the benefits of a self build mortgage?

What are some drawbacks of a self-build mortgage?

FAQs -Self-Build Mortgages

There are two types of self build mortgages available for you to choose from.

1. Arrears Mortgages: These are indeed a common option for financing a self-build home if you have a significant amount of cash available. The payments are made in stages after each phase of the build is completed. However, it’s important to note that with an arrears product, you need funds to pay suppliers and trades yourself. You’ll then be reimbursed by your self-build mortgage lender (up to an agreed percentage of the costs) when that stage is complete.
2. Advance Mortgages: These mortgages provide funding for each stage of a project by releasing payments at the beginning of each stage. This means you can buy the materials and pay for labour using your mortgage. However, your description seems to suggest that you won’t need short-term or bridging loans if you choose an arrears self-build mortgage, which seems to be a mix-up. It should be noted that with an advance mortgage, you won’t need short-term or bridging loans to cover the upfront construction costs.

Also, there is another type of self-build mortgage known as Arrears stage payment mortgages (cost-based). This type of mortgage is linked to what you actually pay for each stage of your project.

Lastly, while it’s true that there are fewer providers who offer these options and the rates may not be as competitive as other types of mortgages, it’s also worth noting that once your self-build is habitable, some lenders will allow you to switch to a lower rate of interest.

What is the maximum loan amount for a self-build mortgage?

The amount you are able to borrow is determined by your individual financial situation, taking into account factors such as your income, expenses, outstanding debts, and other financial considerations. Like all mortgage applications, affordability and credit checks will be required, and the loan will undergo stress testing. If you are interested in getting a self-build mortgage, you can always contact our team of specialist advisers.

What are the eligibility requirements for a self-build mortgage?

Some lenders may allow you to make upfront rental payments without affecting your monthly income and expenses.

Lenders who manually underwrite applications can evaluate each application based on its individual merits, which can be beneficial for complex self-build projects. However, certain lending institutions may have restrictions on lending for specific construction systems, so it is recommended to check with them.

Ensuring that your design and construction methods comply with the current Building Regulations is important. Each lender has different criteria, so make sure they are informed of your build type and any payment terms and conditions set by your supplier.

Certain lenders may stipulate that a fixed build cost budget must be adhered to, while others may require information on build costs from a qualified quantity surveyor.

How can I obtain a self-build mortgage?

The documentation needed for a self-build mortgage is similar to that of a standard mortgage. Additional supporting documentation may be necessary and could include:

• Copy of planning permissionPermission granted by the local authority for a property to ...
• Copy of construction drawings and specifications
• Copy of total project cost estimate (where possible, fixed-price contracts)
• Copy of Building Regulations approval

Is the ‘Help to Build’ scheme beneficial for obtaining a self-build mortgage?

The government’s Help to Build scheme provides assistance for self builders in financing their projects, although it does not offer self build mortgages.

Help to Build offers the opportunity to apply for an equityThe difference between the value of the property and the amo... loan from the government, which can range from 5% to 20% of the estimated build cost (up to 40% in London). A self build mortgage is required to take advantage of this scheme, along with a mortgage from a Help to Build registered provider.

The equity loan for your self-build home is only paid after the construction is completed. The government will then pay the equity loan amount to your mortgage lender, and your self-build mortgage will transition to a repayment mortgage.

What are the benefits of a self build mortgage?

Constructing your own home has the potential to save a substantial amount of money, especially if you already have land and permits in place.

Stamp dutyA tax paid by the buyer when purchasing a property. is not applicable to building work, but if the value of the land exceeds £125,000, duty must be paid, which may be lower than the value of the completed property.

It is common to notice that the cost of construction is typically lower than the price of purchasing an existing home.

The property has a high value. Self-builders may discover that the value of their completed property exceeds the combined expenses of the land, materials, and labor.

What are some drawbacks of a self-build mortgage?

When looking for a self-build mortgage, it is important to explore multiple lenders to find the best deal. Interest rates on reverse mortgages are typically higher than those on traditional mortgages, which may result in higher overall costs.

The lender may expect a higher overall cost of borrowing due to the increased level of risk. In addition, advance funding must be obtained through a single premium insurance policy.

This type of insurance requires an initial lump sum payment to mitigate the lender’s risk, with potentially high premiums.

Typically, 10% of your mortgage will be disbursed once the project is fully completed.

Overall

Self-build mortgages can be a great option for individuals looking to construct their own homes. It is important to carefully research and understand the various requirements and potential drawbacks of these types of mortgages. By being well-informed and working with qualified professionals, you can navigate the process successfully and achieve your dream of building your own home.

Needingadvice.co.uk offers a service that connects individuals with qualified mortgage brokers to find competitive mortgage options. For any assistance needed, please contact us via phone or email.

FAQs -Self-Build Mortgages

What is a self-build mortgage?

A self-build mortgage is a specialised mortgage product designed for individuals undertaking their own residential construction projects. This type of mortgage releases funds in stages, commonly known as a staged release, to fund different phases of the build on a plot of land.

When are funds released with a self-build mortgage?

Funds are released at various stages of the construction, often termed funds in stage or stage payment. This could be in arrears, known as an arrears stage payment mortgage, where funds are provided after each phase is completed, or via an advance stage payment mortgage, which provides funds at the beginning of each stage to aid with cash flow.

Are there different types of self-build mortgages?

Yes, there are multiple types of mortgage for self builds, including the common type of arrears mortgage and the advance mortgage. Each type caters to different aspects of cash flow and project management needs during the construction.

How much can I borrow with a self-build mortgage?

You can typically borrow up to 75% to 85% of the project cost or the home’s final value, whichever is less. The maximum loan amount depends on your mortgage lender’s assessment of your affordability check, credit history, and the detailed planning permission of the project.

Will I be eligible for a self-build mortgage?

Eligibility for a self-build mortgage is based on a detailed mortgage application process where the lender evaluates your bank statementsA record of a borrower's financial transactions often requir..., credit card history, bills on time, and the detailed plan of the self build project. Bad credit can affect eligibility but doesn’t necessarily preclude it.

How do I apply for a self-build mortgage?

To apply, you’ll need a comprehensive project plan, proof of land purchase, outline or detailed planning permission, and a breakdown of construction costs. Your mortgage application will be reviewed by a mortgage lender, possibly through a mortgage adviser or broker.

7. Can ‘Help to Build’ make it easier to get a self-build mortgage? The ‘Help to Build’ scheme, where available, can provide an equity loan, making it easier to manage upfront costs such as land purchase and initial construction phases, potentially enhancing the affordability of your project.

8. Which banks offer self-build mortgages? Many banks and building societies, such as Suffolk Building Society and Ecology Building Society, offer self-build mortgage products. Each institution has different lending criteria and mortgage rates, so consulting a specialist mortgage adviser is recommended.

9. What are the latest mortgage rates? Mortgage rates, including variable rates and competitive rates, can fluctuate based on the mortgage deal and the economic environment. Rates specific to self-build mortgages often carry a premium due to the bespoke nature of the mortgage product.

Are self-build mortgage interest rates higher than standard mortgages?

Yes, mortgage interest rates for self-build projects are generally higher than those for traditional mortgages or normal residential mortgages due to the perceived higher risk associated with construction projects.

Do I change my mortgage once the build is complete?

Many self-build mortgages convert to a standard or normal mortgage upon completionThe point at which a property purchase is finalized and owne..., evidenced by a completion certificate. Others may require refinancing into a new mortgage deal, potentially with a different type of mortgage like a conversion project mortgage or renovation mortgage.

Can I use a bridging loan instead of a self-build mortgage?

A bridging loan is a short-term funding option that can be used during the construction phase before a long-term self-build mortgage is secured. Bridging loans are particularly useful for managing cash flow and immediate construction costs but generally have higher interest rates.

Do I need insurance and warranties to get a self-build mortgage?

Yes, securing site insurance and warranties is crucial for protecting the mortgage fund and ensuring mortgage repayment security for both the lender and borrower during the construction phase.