Financing your self-build
If you’re building your own home, you won’t be able to get a standard residential mortgage. Instead, you’ll need a self-build mortgage – unless you’re lucky enough to have a huge lump sum saved up.
What makes a self-build mortgage different?
A self-build mortgage can exist in all of the same varied forms as an ordinary mortgage, from repayment to interest only. The biggest difference between a regular mortgage and a self-build one is that instead of receiving one large sum of money when you buy a property, funds are given to you in stages. This both reduces the lender’s risk and gives you money at the points you need it during your self-build project. Spreading the payments also means you are less likely to run out of funds half way through a project.
Arrears or advance types?
Each self-build mortgage is different, but most are either arrears or advance stage mortgages.
Arrears-type self-build mortgages – these are suitable for those who have a large cash sum of their own, as payments are made after the completion of key stages.
Advance type mortgages – these release payments at the beginning of each stage of the build, meaning money is available when you most need it (such as when labour or material bills are due). This removes the need for bridging loans to cover any shortfall. Funds are generally released in six stages: starting with purchase of land, through foundation work level, wall plate level, when the property is watertight, finishing with the last two stages of plastering the interior walls and on completion.
Will I pay more?
Interest rates for self-build mortgages tend to be higher, so it pays to research and take advice before deciding which one to choose. Lenders will expect a deposit of at least 25%, and you also have to consider rental costs for accommodation while you are building your home.
However, you will save money on Stamp Duty as there is none on the building work or on the value of the property once it is built. You only have to pay duty on the cost of the land itself if the price exceeds £125,000. Most lenders will let you move onto their standard mortgage products and rates once the build is complete and you are living in your home.
Check out your lender’s conditions when it comes to materials
“There are other modern approaches to building homes, some of which are environmentally friendly and energy efficient, saving you money on the eventual running of your home. However, as some of these materials are not yet tried and tested, lenders can be relatively reluctant to lend if they are used as part of a build.”