Around 15,000 people each year choose to build their own home, but unless you have a significant amount of savings available, it’s likely that you’ll need a mortgage to fund your build.
Self-build mortgages are specifically designed to help people finance building their own homes and come with different features from standard residential mortgages. They also come with higher mortgage rates than traditional mortgages, so if you already own a property, you may want to think about funding your self-build project by remortgaging your existing home. You can find out more about what sort of mortgage deals might be available to you in our guide Mortgages for over 50s: what you need to know
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
If you don’t already own a property that you could remortgage to raise capital, here’s everything you need to know about self-build mortgages.
Contents
- What are self-build mortgages?
- When are funds released with self build mortgages?
- How much can I borrow with a self-build mortgage?
- How much of a deposit do you need with a self-build mortgage?
- Do you need to pay Stamp Duty with a self build mortgage?
- Which lenders offer self-build mortgages?
- How to apply for a self build mortgage
- Can you remortgage to a normal mortgage?
What are self-build mortgages?
Self-build mortgages are a specialist type of mortgage to help fund the cost of a property you’re building yourself. Rather than receiving a lump sum at the outset, as you would with a standard mortgage, self-build mortgages are paid in instalments as the build of your property progresses.
The exact stages at which you’ll receive these instalments will depend on your lender’s criteria and your particular building project. Generally as the build progresses, you’ll get more money to fund the next stage of construction.
Self-build mortgages usually fall into one of two categories, arrears or advance:
Arrears
This is the most common type of self-build mortgage where your payments are released once you’ve completed each agreed stage of your build.
If you choose this option, you’ll need a considerable amount of cash available so you can pay for each stage of the build and then effectively be repaid by the mortgage.
Those without a lot of cash savings to hand, might need a short term or bridging loan to help cover your costs until you receive your payment from your lender.
Of the two types, arrears self-build mortgages tend to offer better rates, as they are lower risk for lenders, because they’ll have peace of mind that they won’t be lending you more than your project is currently worth.
Advance
The less common option is an advance self-build mortgage, where your lender pays you at the start of each build stage rather than after. Fewer lenders offer this type of self-build mortgage.
This means that you won’t need to take out any other loans to fund the build between payments as you’ll have the cash upfront.
It can be a good option to help with cashflow, and is often better for people who don’t have a large amount of savings readily available.
The rates on advance self-build mortgages tend to be higher than on arrears ones.
When are funds released with self build mortgages?
As mentioned, every lender will have a different approach to when they release funds for self-build mortgages. How you plan to build the property will impact the payments, so you might be paid at different intervals if you’re building it yourself as opposed to paying someone to do it for you.
Generally you might receive payments for the following stages:
- Buying the land – some, although not all self-build mortgages will cover the cost of the plot as well as construction of the property itself, so if you need this, make sure to check your type of mortgage offers it. To have the purchase of the land covered by the mortgage, you’ll usually need to have planning permission already in place. Some lenders will also require you to have drawings from a qualified architect available.
- Laying the substructure / foundations
- Construction of walls to the height of the eaves (where the roof starts)
- Construction of roof so the property is wind and water tight
- First fix
- Second fix
- Certified completion.
How much can I borrow with a self-build mortgage?
The amount you’ll be able to borrow depends on your financial situation and is calculated based on your income and outgoings. As with normal mortgages, you’d normally expect to be able to borrow between four and five times your annual income.
The amount you can borrow will also depend on other factors, including whether you already own the land you’re planning to build on or not. If you own the land, you’ll typically be able to borrow up to 75% of the final value of the property once it’s been built (subject to affordability assessments). If you don’t own the land yet then the amount you can borrow will vary. Bear in mind that self-build mortgages are a specialist loan, so what you’re able to borrow won’t always be a straightforward calculation.
How much of a deposit do you need with a self-build mortgage?
Most mortgage brokers suggest that you have a minimum of 25% deposit and 10% on top of this in case of emergencies for self-build mortgages. Again the amount you’ll need will vary depending on your individual circumstances.
Do you need to pay Stamp Duty with a self build mortgage?
One of the benefits of building your own home is that you only need to pay Stamp Duty Land Tax on the value of the plot, and not on the final value of your property. When buying land for a residential property, the following rates of tax apply:
Property or lease premium or transfer value | SDLT rate |
Up to £250,000 | 0% |
The portion from £250,001 to £925,000 | 5% |
The portion from £925,001 to £1.5 million | 10% |
The portion above £1.5 million | 12% |
Which lenders offer self-build mortgages?
The number of lenders offering self-build mortgages has declined over the last few years, but at the time of writing, the following currently offer them:
- AIB (NI)
- Beverley Building Society
- Build Loan
- Buckinghamshire Building Society
- Ecology Building Society
- Furness Building Society
- Hanley Economic Building Society
- Lloyds
- Newcastle Building Society
- Scottish Building Society
- The Melton Building Society
- The Tipton
- Vernon Building Society
If you’re looking for a self-build mortgage then it’s normally best to find a mortgage broker that specialises in this type of lending. One of biggest self-build mortgage brokers is Build Store, but there are several others which also deal with this kind mortgage.
How to apply for a self build mortgage
Applying for a self-build mortgage is more complex that applying for a standard mortgage as you’ll normally have to provide a number of documents to your lender to support your application including:
- Evidence of planning permission
- Construction drawings and specifications from a qualified architect
- The total project cost estimate
- A copy of your Building Regulations approval
- Proof of your site self build insurance and structural warranty
- Architect’s professional indemnity cover (where required)
In addition, your lender will want to see all the usual things you’d need to provide with a mortgage application, such as proof of identity and evidence of your income and outgoings. You’ll normally have to provide the following documents:
- Driver’s license or passport showing your name and address
- Utility bills
- Employment details with proof of your income
- Payslips for the last three to six months
- Bank statements for the last three to six months
- Evidence of your deposit
Can you remortgage to a normal mortgage?
You will normally be able to remortgage to a normal mortgage once your build is complete, the property is habitable and the building work has been signed off by a chartered surveyor.
An important thing to bear in mind, however, is that if your property is is of non-standard construction, then getting a regular mortgage could be tricky, and it’s more likely that you will have to find a specialist mortgage provider.
As with any remortgage, you might need to pay early repayment fees to your current lender if you are leaving your current deal before it finishes, along with any other arrangement or product fees.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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