A self-build mortgage lets you borrow money to build your own home. You cannot use a typical residential mortgage to fund the construction of a new property, so if you’ve always dreamt of designing your house from the ground up, this is the kind of loan that you need.
The main difference is that a self-build mortgage releases cash in stages rather than giving you one big lump sum. This has several benefits such as:
It reduces the risk for the lender and means they can check you’re using the money as intended
It helps to ensure that you don’t run out of funds mid-way through the project
With a self-build mortgage, your money is released in stages rather than as a single lump sum. These self-build mortgage stages are agreed in advance, but the exact timings depend on your lender’s rules so always check the terms before you start.
Some lenders release funds at the beginning of each stage, while others only release money after the work is completed. Common self-build mortgage payment stages include:
Buying the land
Laying the foundations
Building the main structure (the ‘shell’)
Completing plastering, plumbing, and electrics
Finishing the build and getting a final valuation
When planning your project, think about how hands-on you want to be. Doing much of the work yourself, with the help of qualified trades, can lower self-build mortgage costs. If you’re not experienced in construction, you could act as project manager, hiring and coordinating surveyors, architects, and tradespeople.
If you’d rather not be involved in the day-to-day, you can appoint a main contractor to manage everything. Check with your lender if their fees can be included in your self-build mortgage
This is the most common type of self-build mortgage – where you receive the finance after you've completed each stage of the development.
You'll have to prove how much the work cost, for instance with receipts and invoices. For this kind of self-build mortgage, you'll need to find a way to pay upfront for materials and costs as you won’t be reimbursed until later.
The other type of self-build mortgage offers advance stage payment. Money is released to you by your lender before you need to pay each bill for labour or materials, so you don’t need to worry about finding money upfront.
This is good from a cash flow perspective, particularly if you don’t have lots of liquid savings you can access. Unfortunately, this type of mortgage is offered by fewer lenders and the interest rates are often higher.
This is the most common type of self-build mortgage – where you receive the finance after you've completed each stage of the development.
You'll have to prove how much the work cost, for instance with receipts and invoices. For this kind of self-build mortgage, you'll need to find a way to pay upfront for materials and costs as you won’t be reimbursed until later.
The other type of self-build mortgage offers advance stage payment. Money is released to you by your lender before you need to pay each bill for labour or materials, so you don’t need to worry about finding money upfront.
This is good from a cash flow perspective, particularly if you don’t have lots of liquid savings you can access. Unfortunately, this type of mortgage is offered by fewer lenders and the interest rates are often higher.
Full design control – Choose the location, size, layout, and interior finishes to create a home that’s completely tailored to your needs.
Stamp Duty savings – No Stamp Duty is paid on the property itself, its building costs, or its completed value.
Land-only Stamp Duty – You only pay Stamp Duty on the land purchase, and only if it costs more than £125,000.
Potential profit – When finished, your home could be worth significantly more than the combined cost of the land and construction.Building your own home means you get to choose everything about it including where it is, what it looks like, how big it is and the interior features. It's completely bespoke to your needs.
If you're building your own home, lenders usually need a larger deposit compared to if you were buying an existing residential home.
Every mortgage has a loan to value (LTV) which is the percentage of the property's value the lender will cover. For example, if the LTV was 75%, you'd need to put down the remaining 25% as a deposit.
Self-build mortgages often have a separate limit on how much you can borrow for buying the land, and your projected costs for building the house. For example, they might let you borrow 75% of the total cost of the land, and 85% of the expected costs to build the property.
The total amount you can borrow depends on several factors including your:
Income
Self-build plans
Credit history
Outgoings
This amount, alongside your deposit, needs to cover the entire cost of the build and the land.
Before you start your self-build, you'll need to know:
Where you're going to live while you build your new home. Will you move in with friends or family? Will you stay in your existing home? Will you rent? You'll need to consider whether your plan will affect your budget. Renting, for example, can be expensive.
The build system you're going to use. It needs to comply with current building regulations and some lenders don't allow certain types of construction methods. So, think about this carefully and consider your options.
Your estimated build cost. Some lenders will want you to stick within a specific budget. Others will want costs to be confirmed by a quantity surveyor. It's always an idea to include some contingency within your budget.
Other costs you might not have considered. For example, fees for construction design and costs, or demolition and site preparation. There's also planning consent, land purchase fees, and project management to think about.
Compared with a standard residential mortgage, it can be harder to be accepted for a self-build mortgage. As it’s a more niche mortgage product, lenders may consider it higher risk, meaning they will expect a larger deposit worth at least 25% and charge higher interest rates.
On top of this, you will also need to show that you’ve acquired planning permission to build on the land and thought through property plans and associated costs.
Funds will either be released in arrears, once you’ve made payments or in advance of when bills are due. Typically, the money comes in tranches tied to specific stages of the property's development. For instance, when you:
Buy the land
Build the foundations
Construct the house's shell
Finish the plastering, plumbing and electrical wiring
Complete the project and get the home valued
If you want convenience and aren’t looking for very specific features in your home, an existing property may be a better option for you. However, this may come at a higher price tag.
Building a home can work out much cheaper if things go well and you can build your home to your own personal specifications. However, it could involve much more work, planning and risk. Here are the pros and cons of building your own home.
To build your own home, it’s important to set a budget, work out the cost and plan the timescales carefully. There are many things you’ll need to consider like how you will fund the build, accessibility, and planning permission. Don’t forget, that you’ll be responsible if anything goes wrong, so you’ll need to have contingencies in place. Here is everything you need to know about building your home.
Yes, you must get planning permission to be legally allowed to start building. There are two levels of planning permission available - outline planning permission and detailed or full planning permission. Here is how to get planning permission.
Yes, you could switch to a normal mortgage with a lower interest rate once the build is complete. In fact, many lenders will offer a product switch at the end of your project. Make sure you check whether your self-build mortgage comes with early repayment fees before you decide.
Use the links below to find out about other mortgages
