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What is a self-build mortgage and can I get one?

Updated 07 May 2020

Nick Green
Financial Journalist

Self build mortgages for building your own home

If you are planning to build your own home instead of buying one ready-made, a conventional mortgage probably won’t suit you. Assuming you have identified (or already own) a suitable plot of land and have planning permission to build a house, you will usually need to finance this project with a self-build mortgage. Here you can find out how this mortgage is different, and how to get one.

What is a self-build mortgage and how does it work?

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 needs to work differently, because the lender’s usual main security (a house that they could repossess if necessary) doesn’t exist yet. Releasing all the money at once would therefore expose a lender to unacceptable risk.

Instead, with a self-build mortgage the lender releases the money in instalments. These instalments are designed to fund each phase of construction, so the project is paid for in stages as you go along. With some self-build mortgages the money is released in advance (i.e. you’ll get the money to lay the foundations before you lay the foundations), but some release it in arrears (i.e. you’ll have to pay for each stage of construction yourself, and then claim the money back when the next instalment is paid out. The arrangement varies between different lenders and mortgage deals, so make sure you get the type that suits your circumstances.

Types of self-build mortgages

Here you can read more details about the two types of self-build mortgage: advance and arrears.

Advance

Your lender releases payments at the beginning of each stage of the construction project, so you can use it directly to pay for materials and labour (and purchasing 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 per cent of the total loan amount until your house is awarded a completion certificate.

Arrears

With this type of mortgage, the funds are released to you at the completion of each stage. This means you have to handle the costs of materials and labour until the lender is satisfied each part of the process 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 the savings available, you could use bridging loans to cover the costs up-front and then repay these from the mortgage monies.

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, as is the value of the finished house. That means you will only have to pay duty on the value of the land itself if it exceeds £125,000, which is likely to be far lower than the value of the completed property. Barring mishaps, you will often find too that the cost of construction is lower than the amount you would have paid for an existing home.

What are the downsides of a self-build mortgage?

Only a limited number of lenders offer self-build mortgages, so you may have to hunt around a bit more to find the right deal. A mortgage broker can search the market on your behalf to find the right one for you. Find out about mortgage broker fees.

The overall cost of borrowing is likely to be higher, due to the higher level of risk for the lender. It is also a requirement that advance funding is secured on a single premium insurance policy. This kind of insurance involves you paying a lump sum upfront in order to reduce the lender’s risk further, and the premiums can be high. You will usually have to wait to receive 10 per cent of your mortgage once the project is fully completed.

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 insurance to cover the costs of long delays or overspending, as well as theft, vandalism and damage caused by bad weather.

You may also end up needing more money to finish a particular stage of your project. Your self-build mortgage provider might agree to release more of your funds early. The obvious problem here is that there will be less money available for the rest of the project. Alternatively, a bridging loan is another way to plug the gap and keep your build moving.

Who can get a self-build mortgage?

Before you start approaching lenders, you will need to see if your project qualifies for a self-build mortgage. The qualifying requirements will 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 too. Having a larger deposit of between 25- 40 per cent, a good credit history and proof of reliable income will be crucial. Lenders are more cautious when it comes to self-build projects, so getting an expert 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 should put together detailed projections of costs and timeframes, along with risk assessments and contingency plans.

Make sure you have a detailed map of the site, clear floorplans and a rundown of how your anticipated budget will be spent. Some lenders may insist on you using conventional materials, as this helps facilitate the valuation once the project is complete.

You should also check the planning conditions to make sure you are fully permitted to build the kind of structure you want on the land. Your lender may also want a warranty, or to have the project supervised by an architect or professional consultant.

Finally, you will need to show your lender that you have enough money to live somewhere else while the work is being done. An acceptable low-cost option may be to live on-site in a caravan, or to move in with long-suffering relatives!

Self-build mortgages can be a great tool for helping you achieve your dream home at an affordable cost. Enlisting a specialist mortgage broker really makes a difference when it comes to dealing with smaller, more niche lenders and products.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.