Self Build Mortgages: Your Comprehensive Guide

Have you ever heard about self build mortgages? Self build mortgages are a great way to finance your own home. A self build mortgage is a loan that is used to finance the construction of one’s own house. It is typically taken out from a bank or building society and is secured against the value of the land and property being built upon. Here in this article on mortgages for self build properties, we will explore the topic in-depth detail. So, let’s start.

Who doesn’t have a vivid picture of their dream home in mind? It’s your dream and yours alone. So, you’ll want to maintain complete control over the building work and make it all a self-build project.

Although it’s a self-build project, that doesn’t mean it’s likely to come any cheaper. Love Property magazine, for instance, revealed that the average cost of a self-built property – including the land, fees and building costs – is close to half a million pounds.

Your £500,000 or so investment is likely to be a sound decision, of course. But that doesn’t much help to find the half-million pounds in the first place – even if you have sold your existing home to build your dream home.

The solution may lie in a specialist self-build mortgage.

What is a self-build mortgage?

Just as the name suggests, a self-build mortgage is specifically designed to provide the finance you need for the building work on the dream home you have set your sights on.

A self- or own-build mortgage is a specialist mortgage that differs in important ways from a conventional mortgage. Those differences are described in a guide published by Homebuilding & Renovating – the main one being that the mortgage funds are released in key stages as the building project progresses, rather than in one upfront lump sum as in a standard mortgage.

Whereas the transaction funded by a standard mortgage calls for the whole of the advance in a single sum, your self-build project is better served by receiving the mortgage loan in instalments. That way, some of the ups and downs and unpredictable time scales of such a building project become less of a risk for both you and the mortgage lender.

Your carefully planned budget can be thrown into confusion, for instance, if materials and supplies end up costing more than you reckoned, specialist jobs to be done by electricians or plumbers cost more than originally budgeted, or builders simply fall down on parts of the job, and the work needs to be done again.

In this article, we will also discuss the self build mortgages in Northern Ireland, Scotland, Wales and England.

Getting a Self Build Mortgage in Northern Ireland

Northern Ireland is one of the four nations that make up the United Kingdom. Although NI has a devolved legislature, it’s still subject to the same rules regarding mortgages as England, Wales and Scotland.

If you are looking for self-build mortgages in Northern Ireland, then you will be able to find something suitable, as there are several lenders offering these types of products. We would suggest you contact a Specialist Broker for Mortgage services in Northern Ireland.

Getting a Self Build Mortgage in Scotland

Scotland is another of the four nations that make up the United Kingdom. As with elsewhere in the UK, Scotland is subject to the same rules regarding mortgages as England, Wales and Northern Ireland.

If you are looking for self-build mortgages in Scotland, then it will be complicated as not all lenders offer these kinds of products. That’s why it is best to contact a specialist broker who can help you with the process.

Getting a Self Build Mortgage in Wales

Wales is one of the four nations that make up the United Kingdom, and like elsewhere in the UK, mortgage rules are largely similar across all four nations. If you are looking for self-build mortgages in Wales, then you should be able to find something suitable, as there are several lenders offering these types of products. A Specialist Broker for Mortgage services in Wales can help you find the right self-build mortgage product for you.

Getting a Self Build Mortgage in England

If you’re looking for a self-build mortgage in England, then there are numerous lenders offering these types of products. As with elsewhere in the UK, mortgage rules are largely similar across all four nations, so you should be able to find something suitable. A Specialist Broker for Mortgage services in England can help you find the right self-build mortgage product for you.

How does a self-build mortgage work in the UK?

A self-build mortgage is an advance designed to cover all the costs involved in building your dream home – from buying the land, paying an architect to draw up the plans, buying the supplies and materials, and paying your builders and contractors for the work they do.

As already mentioned, though, a self-build mortgage is different in that the advance is released to you in instalments:

• the first instalment may be advanced to allow you to buy the land, for example – which is also your first opportunity to enjoy some of the cost savings in a self-build. You only pay stamp dutyA tax paid by the buyer when purchasing a property. on the purchase of the land – and if it costs less than the threshold of £125,000, you pay no tax at all;

• a further instalment is likely to be paid over once the foundations have been laid;

• more instalments follow as the building project progresses and the roof is added;

• penultimate payments may be made when the roof is sealed, the inside walls have been plastered, and

• the final 10% of your self-build mortgage is typically delayed until the building project is finished and you have been issued a completionThe point at which a property purchase is finalized and owne... certificate, awarded by the local authority within eight weeks of completion

You need to pay particular attention to the fact that your mortgage lender will only release instalments when agreed phases of the building project have been completed – partly to ensure that the money advanced is only for building your house. If you go over budget, that is your responsibility since the lender is unlikely to advance any further instalments until completion of the one in hand – whatever the eventual cost.

Can I get self-build mortgage as a first-time buyer in the UK?

Yes, of course, as a first-time buyer, you can get a self build mortgage.

In terms of eligibility and qualification, self-build mortgages are treated in much the same way as any other mortgage application – including those from first-time buyers.

The size of your deposit is clearly critical – it helps the lender to determine the loan-to-value ratio of the mortgage – as is your ability to meet the lender’s affordability criteria and stress tests.

Who offers self-build mortgages?

Although self-build mortgages are offered by a reasonably wide range of lenders, the pool is probably smaller than you would otherwise find. Some of the common lenders for such mortgages are Nationwide, Natwest, HSBC, Barclays etc.

To ensure that you maintain as wide a choice as possible and can identify the most competitive offers, therefore, you might want to consult a reputable mortgage broker.

What are the rates like on self-build mortgages?

Self build mortgage rates in the UK are typically higher than standard mortgage rates. As of September 2023, the current best rates for self-build mortgages are:

• 6.29% interest rate, 6.6% APRC, £799 application fee (Ecology Building Society)
• 6.78% interest rate, 8.9% APRC, £1,499 product fee (Nationwide Building Society)
• 7.00% interest rate, 7.9% APRC, £999 product fee (Halifax)

These rates are subject to change, and the actual rate you are offered will depend on a number of factors, including the size of your deposit, the lender you choose, and the type of mortgage you take out.

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

As with any mortgage application, the maximum amount you may borrow for a self-build mortgage depends entirely on your individual financial circumstances – principally, your income, the deposit you have to offer, your ongoing expenses, existing borrowing and credit, and creditworthiness.

The lender’s calculation of the affordability of any mortgage is also influenced by the loan-to-value (LTV) ratio they are prepared to offer. By way of illustrationA document that shows the costs and terms of a mortgage, inc...,the Halifax Building Society is prepared to consider advances equivalent to an LTV of 75%. In other words, you would need to find at least 25% of the cost of buying the land and cover the cost of materials, and the payment of builders and contractors.

What are the benefits of a self-build mortgage?

A self-build mortgage allows you to build your dream home. A one-off. A unique home that you have designed and built yourself.

The self-build mortgage lets you do that – and one of the (potentially huge) benefits of self-build is that your liability for stamp dutyis likely to be limited to the purchase of the land alone. And stamp duty on the purchase of the land only begins to kick in above the threshold of £125,000.

The other benefit is that your home is likely to be worth a lot more when it’s finished than what you’ve spent on building it and buying the land.

What are the drawbacks of a Self Build Mortgage?

Here are some of the drawbacks of self-build mortgages:

• Higher interest rates: Self-build mortgages typically have higher interest rates than standard mortgages. This is because lenders consider self-build projects to be riskier than buying an existing home.
• Higher deposit requirements: Self-build mortgages typically require a higher deposit than standard mortgages. This is because lenders want to make sure that you have enough money to cover any unexpected costs that may arise during the construction process.
• More paperwork: Self-build mortgages involve more paperwork than standard mortgages. This is because lenders need to be more involved in the construction process to make sure that everything is done correctly.
• More risk: Self-build projects are inherently more risky than buying an existing home. This is because there is always the possibility that something could go wrong during the construction process, which could delay or even derail the project.
• Less flexibility: Self-build mortgages are typically less flexible than standard mortgages. This is because lenders want to be able to control the construction process to make sure that their investment is protected.

If you are considering a self-build project, it is important to weigh the drawbacks of self-build mortgages against the benefits before you make a decision. If you are not comfortable with the higher interest rates, higher deposit requirements, more paperwork, and more risk, then a self-build mortgage may not be the right option for you.

Summary

Although a reasonable number of leading banks and building societies offer self-build mortgages, they may be fewer and further between than standard mortgages. Lenders might consider them higher risk, and you may, therefore, have to pay a slightly higher rate of interest.

To ensure that you identify the most favourable and competitively priced self-build mortgage deals on the market, therefore, you might want to consult a specialist mortgage broker.

FAQs

1. What is a self-build mortgage?

A self-build mortgage is a specific type of mortgage product designed to facilitate individuals in financing the construction of their own homes. Unlike a standard or traditional mortgage, it releases funds in stages as different construction milestones are reached. This kind of mortgage is facilitated by specialist mortgage lenders who are adept at understanding the nuanced requirements of a self-build project.

2. How does a self-build mortgage work in the different regions of the UK, including Northern Ireland, Scotland, Wales, and England?

In all regions of the UK, the functioning of a self-build mortgage remains essentially the same, adhering to the general mortgage term and lending criteria. However, it is recommended to consult a regional mortgage broker, such as a Specialist Broker for Mortgage Services in Northern Ireland or Buildstore Mortgage Services in England, to guide you through specific regional norms and help you get the best mortgage deal.

3. Can first-time buyers avail of a self-build mortgage?

Yes, first-time buyers can avail of a self-build mortgage. While the application process and eligibility criteria remain relatively parallel to other mortgage types, consulting a qualified mortgage adviser could facilitate a smoother mortgage process, ensuring the necessary credit checks and evaluations are met.

4. How do the mortgage fund releases work in a self-build mortgage?

The mortgage funds are released in stages, often in sync with different phases of the construction period. This method, known as stage release, involves an initial release to facilitate land purchase, followed by subsequent releases at various milestones like laying the foundation, erecting the structure, etc. The final instalment, constituting around 10%, is released upon the successful completion of the project and receipt of completion certification from the local authorities.

5. Are there specific requirements for the plot of land where the home is to be built?

Yes, prior to the plot purchase, it is essential to ensure it has at least outline planning permissionPermission granted by the local authority for a property to ... to ascertain that you can legally undertake a residential project on it. Moreover, being aware of the building regulation in the area will guide the construction period planning to adhere to local norms.

6. How are the interest rates determined for a self-build mortgage?

The interest rates, which can be variable or fixed, depend on several factors, including your credit score, the lender’s terms, and the broader economic environment. As of the date mentioned in the article, the rates varied across lenders like Ecology Building Society and Furness Building Society, with additional costs like application fees and product fees affecting the overall cost.

7. How can one estimate the monthly repayments for a self-build mortgage?

You can use a mortgage calculator to estimate your potential monthly mortgage payment, based on various factors, including the loan amount, mortgage term, and interest rate. These tools often offer a reliable approximation of the monthly repayment, aiding in better financial planning.

8. What is the role of a mortgage broker in obtaining a self-build mortgage?

A mortgage broker can provide invaluable assistance in navigating the complex landscape of a self-build mortgage. They can help identify the most favourable mortgage provider, assist with the mortgage application, and offer advice on meeting lending requirements, including suggestions on maintaining a good credit score. Their expertise can aid in securing an exclusive mortgage that suits your financial circumstances, leveraging their knowledge of various offerings from mainstream to specialist lenders.