What is a self-build mortgage and can I get one?
Learn everything you need to know about how self-build mortgages work, whether they pay in advance or in arrears, and how to get one.
If you’re planning to build your own home instead of buying one, you may want to consider a self-build mortgage instead of a conventional mortgage.
Building your own home is incredibly exciting, but without carefully managing your cash flow, it can also be extremely expensive and stressful. Getting the right mortgage in place can help the project run smoothly, so you get the home you’ve always dreamed of.
A self-build mortgage allows you to finance the construction of your home in stages, rather than receiving a lump sum like a conventional mortgage.
If you already own land and have planning permission, a self-build mortgage can help fund each phase of your project, releasing money as the build progresses.
We reveal everything you need to know about how to get a self-build mortgage, including how they work and how much you can borrow.
With a self-build mortgage, the lender releases the money in instalments (typically five or six)
There are two types of self-build mortgages, which are advance and arrears mortgages
You’ll need to pass credit and affordability checks to qualify for a self-build mortgage
What is a self-build mortgage and how does it work?
A self-build mortgage is a type of home loan designed specifically for people who want to build their own property, where funds are released in stages throughout the construction process rather than as a single lump sum.
Before you start your self-build project and choose your mortgage, it’s worth doing your research at the Self Build Portal, a resource run by the National Custom & Self Build Association (NaCSBA).
Most types of mortgages are set up so that the buyer can access all the money in one go, in order to hand it over to buy the property.
A self-build mortgage works differently as the lender’s usual main security (a house that they can repossess if necessary) doesn’t exist yet. So, releasing all the money at once would expose a lender to significant risk.
With a self-build mortgage, the lender releases the money in instalments (typically five or six). These instalments are designed to fund each phase of construction, so the project is paid for in stages.
This staggered approach helps ensure that the project remains on track financially.
With some self-build mortgages, the money is released in advance, so you’ll get the money to lay the foundations before that work begins.
However, some mortgage lenders release funds in arrears (meaning funds are released after work is completed) so you’ll have to pay for each stage of the construction yourself and then claim the money back when the next instalment is paid out.
Self-build mortgages vary between lenders, so ensure you get one that suits your circumstances. We can help you find a qualified mortgage broker.
What are the different stages of a self-build project?
Here are the main stages of a self-build project and a summary of how they are funded with either an advance or an arrears payment mortgage.
| Stages of a self-build mortgage | How advance payment mortgage works | How arrears payment mortgage works |
|---|---|---|
| Stage 1 - Purchase the land | Up 95% of funds for land are released up front | You buy the land using your own funds eg. bridging loan |
| Stage 2 - Initial costs and foundations | Cash released up front to cover initial costs | The lender releases some funds after foundations completed |
| Stage 3 - Timber frame | Up-front funds released to cover purchasing and installing timber frame | The lender releases some funds after this stage |
| Stage 4 - Structure is made waterproof | Cash releases to cover roofing materials, tilers, windows and doors | The lender releases some funds after surveyor has signed off building |
| Stage 5 - First fix and plastering | Up-front funds released to cover plumbers and electricians | The lender releases some funds after this stage |
| Stage 6 - Completing project | Final chunk of cash is released upfront to cover final fix eg. kitchen fitting | The lender releases funds some funds after completion certificate |
What are the different types of self-build mortgages?
There are two types of self-build mortgages, which are advance and arrears mortgages.
Advance self-build mortgage
Your lender releases payments at the beginning of each stage of the construction project, so you can use it to pay for materials and labour (and purchase the plot of land if you don’t own it already).
If you only have enough available money to cover your deposit, this loan will ensure you always have sufficient cashflow to keep the project moving.
The lender will usually keep 10% of the total loan amount until your property is awarded a completion certificate.
Arrears self-build mortgage
With this type of mortgage, the funds are released to you after the completion of each stage. So, you have to manage the costs of materials and labour until the lender is satisfied each stage is complete.
More lenders are willing to offer this kind of self-build mortgage, but you will need to have the cash to finance each stage while you wait for your mortgage payment.
If you don’t have enough savings, you could use bridging loans to cover costs upfront and then repay these from the mortgage payments.
The table below shows the key differences between both types at a glance:
| Feature | Advance self-build mortgages | Arrears self-build mortgages |
|---|---|---|
| When funds are released | At the start of each stage of construction | After each stage is completed |
| Cashflow needs | Lower - funds available upfront | Higher - need savings or a bridging loan |
| Availability | Fewer lenders offer this option | More lenders offer this option |
| Risk to borrower | Less pressure on personal funds during the build | Must cover costs first, then get reimbursed |
| Funding during overspend | Each phase is funded, and a 10% to 15% contingency is usually built in | Because funds are paid in arrears, a funding deficit can spiral during a project |
How much can I borrow with a self-build mortgage?
The amount you can borrow with a self-build mortgage depends on many factors, including the mortgage lender, your circumstances and whether you’ve purchased the land for your property.
You’ll also need to pass credit and affordability checks to qualify for a self-build mortgage.
If you own the land on which you plan to build your dream home, you can usually borrow up to 75% of the expected property value.
If you don’t own the land, you may not be able to borrow as much, so it’s worth securing this first if you can.
You should contact a mortgage broker before applying for a self-build mortgage as they can boost your chances of a successful application.
What are the advantages of a self-build mortgage?
Building your own home could potentially save you thousands, particularly if you already own land and have planning permission.
Building work is exempt from stamp duty, but you only have to pay duty on the value of the land if it exceeds £125,000, which is likely to be far lower than the value of the completed property.
You will often find that the cost of construction is lower than the amount you would have paid for an existing home.
But perhaps the biggest advantage for many is it will give you more control over the design of your home.
What are the downsides of a self-build mortgage?
Only a limited number of lenders offer self-build mortgages, so you need to shop around to find the right deal. Interest rates are usually higher than traditional mortgages, so these products can be more expensive.
Unbiased can quickly connect you with a qualified mortgage broker who can find the most competitive mortgage for you.
The overall cost of borrowing is likely to be higher due to the higher level of risk for the lender. If you want to take advance funding, you may need to take out a single premium insurance policy.
This kind of insurance involves you paying a lump sum upfront to reduce the lender’s risk further, and premiums can be high for this type of policy.
You will usually have to wait to receive 10% of your mortgage once the project is fully completed and signed off by your local council’s building control department or an approved private inspector.
It’s also worth flagging that building your own home is time-consuming and takes longer than buying an existing property.
Here’s a quick summary of the pros and cons of a self-build project:
| Advantages | Disadvantages |
|---|---|
| Exempt from stamp duty on building costs | Limited number of lenders |
| Potentially cheaper than buying an existing home | Higher interest rates than traditional mortgages |
| Full control over the design of your home | May need to pay for expensive insurance |
| Can increase property value once completed | Funds released in stages can create cashflow issues |
| Long-term savings potential | Projects can take longer and be more stressful than buying |
What happens if my self-build costs are higher than the funds issued in that stage of the mortgage?
Despite the best planning, self-build projects can overrun and cost more than the initial estimates.
You should consider self-build insurance to protect your project and site during the construction period. This covers the costs of long delays or overspending, as well as theft, vandalism and damage caused by bad weather.
It’s also worth stressing that you may also end up needing more money to finish a stage of your project.
Your self-build mortgage provider might agree to release more of your funds early, but this means there will be less money available for the rest of the project.
Alternatively, a bridging loan is a way to plug the gap and keep your build moving, but this can be expensive, and you should seek advice beforehand.
Who can get a self-build mortgage?
Before you approach lenders, you will need to see if your project qualifies for a self-build mortgage.
The qualifying requirements differ between lenders, but most will specify whether the completed house can be used for residential or commercial purposes.
It is possible for first-time buyers (or, in this case, first-time builders) to get a self-build mortgage. Having a deposit of between 25% and 40%, a good credit history, and proof of reliable income is vital.
Lenders are more cautious with self-build projects, so a mortgage broker can be a real asset.
How to get a self-build mortgage
You will need to show lenders that you have planned your project carefully and rigorously considered every stage. You’ll also need planning permission and buildings regulation approval.
The table below summarises the main steps you will need to take.
| Steps for mortgage application | Details | What lender will expect |
|---|---|---|
| 1 - Site and planning | Secure the plot and get relevant planning permissions and buildings regs approval | Details of plot and planning permission |
| 2 - Construction specs | Finalise construction details with the architect | Architectural blueprint, floor plans and detailed construction specs |
| 3 - Detailed cost estimates | Prepare a budget and cash flow plan | Cash-flow forecast and evidence of contingency |
| 4 - Quality control | Secure structural oversight or project manager | Evidence of structural warranty from the architect |
| 5 - Evidence of outgoings | Plan and funds to live elsewhere during the build | Proof of funds or written agreement to live with relatives |
| 6 - Submit application | Submit relevant forms, evidence and permissions | Your completed application and evidence |
Self-build mortgages can be a great tool for helping you build your dream home at an affordable cost. Using a specialist mortgage broker will make a difference when exploring niche lenders or products.
Can I use a traditional mortgage when my home is built?
Once your dream home is completed and certified by a surveyor, you can remortgage, which will likely come with a lower rate compared to your self-build mortgage.
Some lenders may allow you to do this as soon as your new home is habitable, even if unfinished.
You should watch out for any early repayment fees and consult a broker beforehand.
Get expert self-build mortgage advice
Securing a self-build mortgage involves understanding the unique payment structures and requirements that differ from traditional mortgages.
By choosing between an advance and arrears mortgage and carefully managing costs throughout your project, you could effectively finance your dream home.
Make sure to explore various lenders, consider potential insurance needs, and think carefully about costs to enhance your chances of a successful build. With thorough planning and the right mortgage, you can turn your self-build vision into reality.
Unbiased will match you with a qualified mortgage broker who can help you navigate the complexities of self-build mortgages, ensuring you find the best financing options for your construction project.
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