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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. It reduces the risk for the lender and means they can check you’re using the money as intended. It also helps ensure that you don’t run out of funds mid-way through the project.
Different lenders have different rules about when each tranche of money is released, so check the terms carefully.
Your self-build mortgage will release money at different stages throughout the project. Some deals give you the money in advance, while others release the cash once work is completed. Either way, the money is released at pre-agreed times. This could include when you:
buy the land
lay the foundations
construct the house's shell
finish the plastering, plumbing and electrical wiring
complete the project and get the home valued
Before you start your self-build, you'll need to think about whether you want to do most of the work yourself, or employ people to do it for you. If you're skilled and can take lots of the work on in partnership with plumbers and electricians where needed, it should work out cheaper overall.
If you don't work in the trade, you may be better off taking on the role of managing your surveyor, architect and tradesmen. If you don't want day-to-day involvement, you can get a contractor to manage the whole project for you. Your lender will confirm whether you can factor this cost into 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. 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 cashflow 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 interest rates can be higher.
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.
One of the best things about building your own home and using a self-build mortgage is that you don't have to pay stamp duty on the home itself. This could save you thousands of pounds. You don't pay any stamp duty on the building costs, or on the property's value when it's complete - you just pay stamp duty on the land and only if it cost you more than £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.
If you're building your own home, lenders usually need a larger deposit from you.
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 projected costs building the property.
How much you can borrow in total will depend on several factors including your income, your self-build plans, your credit history and your outgoings. This amount, alongside your deposit, needs to cover the whole cost of the build and the land.
Before you go ahead with 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.
What build system you're going to use. It'll need 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, as well as other factors.
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 self-build mortgages as 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 or niche features in your home, an existing home may be a better option for you, although it may come at a higher price tag. Building a home can work out much cheaper if things go well. 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 have to 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. But you will need to check if your self-build mortgage charges an early repayment fee.
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