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What is a Self-Build Mortgage?
A self-build mortgage is not a conventional mortgage. It is a special type of loan designed specifically for those who want to build their own home from scratch. Instead of using the mortgage to pay off the value of the property you buy, the lender finances the construction of the home. You start paying back the loan after construction is complete.
Self-build loans help the cash flow of building your own home. They help to buy materials and pay contractors to carry out the work.
If you own land and have already been granted planning permission, then opting to get a self-build mortgage is a good option for getting the house built.
It’s worth noting here: If you’re planning on converting a barn or completely renovating an old building, a self-build loan will most likely be the most suitable option for your project.
How do self-build mortgages work?
To reduce the amount of risk involved for the lender, self-build loans are normally released to the lender’s account in stages. Depending on the lending agreement, self-build loans normally follow a 5 or 7-stage process.
The main stages that self-build loans can follow include:
- Land purchase
- Excavations
- Foundations
- Construction
- Roofing
- Waterproofing
- Windproofing
- Internal Completion: First Fix (wiring, plastering, windows, and floors)
- Internal Completion: Second Fix (fitting the bathroom and kitchen, adding doors and electrical fixtures)
- Certified completion
Obviously, the above stages will depend on the complexity of your self-build project. If the house you’re building has several unique aspects, you may find your project has more steps than those listed above.
How much could you borrow with a self-build mortgage?
You can normally borrow between 60% and 80% of the loan-to-value (LTV) ratio for a self-build loan.
The exact amount you can borrow with a self-build mortgage depends on the lender, the extent of the property you want to build, and how much deposit you can contribute.
However, it may be possible to borrow as much as £3 million for your self-build project – again, this depends entirely on the lender and how much faith they have in your project.
Where can you get a self-build mortgage?
You can apply for a self-build loan through a high street bank. Banks that offer this type of mortgage include Halifax, AIB (if you’re in Ireland), and Lloyds Bank. Other places you could apply for this type of mortgage include the Ecology Building Society (if you want to build an eco-friendly building), the Scottish Building Society, BuildStore, and BuildLoan.
Do self-build loans have higher interest rates than regular mortgages?
A self-build mortgage will likely have a higher interest rate than a standard mortgage agreement. Interest rates typically vary between 4% and 6%, but are sometimes upwards of 8%. Before applying for a self-build loan, you need to be prepared to pay high monthly fees for the construction.
Sometimes, once the construction has been completed, you could potentially negotiate a lower interest rate with your provider.
Self-build mortgage deposits
The amount you have to contribute in the form of a deposit for a self-build loan is also significant. As a general rule, most lenders ask for 25% of the construction cost to be contributed by the borrower as a down payment.
How to Apply for a Self-Build Mortgage
To apply for a self-build loan, you’ll need to prepare all the regular aspects of mortgage applications. This includes providing information regarding your employment status, income, ongoing debts, future plans, and credit history.
In addition to the above, you’ll also have to provide information and documentation that is exclusive to self-build mortgages.
For example, you’ll need to provide the building plans for the property. These will need to have been completed by a professional architect. You’ll also have to provide a breakdown of costs for all stages of construction. Lastly, you’ll need to prove you have building permission.
Given how much you have to submit for this mortgage type, completing the application can be complicated. For this reason, it is recommended you enlist the services of a mortgage broker to help you with it.
The Different Types of Self-Build Mortgages
You can categorise self-build loans into arrears and advance mortgages. These categorisations have to do with the method by which the money is released by the self-build mortgage lender.
Arrears mortgages
An arrears self-build mortgage pays you after each stage of the construction is complete. The build mortgages release funds to reimburse you for the upfront cost you paid. This type of mortgage is best for those who can afford to pay for their self-build projects in stages, but can’t afford to pay for the entire project in one.
Advance mortgages
Here, mortgage providers pay borrowers in advance of each stage. This means that self-builders have money to pay for their project in stages. This type of mortgage is best for those who would not be able to pay for the mortgage in stages themselves.
The Pros and Cons of Self-Build Mortgages
Pros
- You can design and build your dream home
- You will one day own the completed property
- It makes buying a home a lot more manageable
Cons
- Fewer lenders offer self-build loans
- Higher interest rates and deposits
FAQs
Do I have to pay stamp duty on a self-build mortgage?
If you already own the land for the property you’re planning on using as a building plot, then you don’t need to pay for stamp duty.
Should I get a bridging loan or a self-build mortgage?
Both self-build loans and bridging mortgage deals can be used to build your own house. You should get a bridging loan if you’d prefer to receive your funds in one lump sum.
Additional sources:
https://www.homebuilding.co.uk/advice/self-build-mortgage
https://www.onlinemortgageadvisor.co.uk/self-build/a-guide-to-self-build-mortgages/
https://www.thetimes.co.uk/money-mentor/article/self-build-mortgages/