A self build mortgage is specifically designed to help facilitate a self builder in building their own home.
Many of us dream of building our own home — but unless you have the cash to fund your homebuilding dreams, you’ll need to have an understanding as to how self build mortgages work.
If you are thinking about taking out a self build mortgage, this guide will explain all — from the types of mortgage available to you, the documentation you will need, what interest rates you can expect as well as the best self build mortgage deals available to you.
How does a Self Build Mortgage Work?
A self build mortgage is released at key stages of the build unlike a traditional mortgage where funds are released in one lump sum upon sale completion.
Some self build lenders will lend on the plot purchase too, but not all do. Rates of interest are typically higher than the standard house purchase/remortgage rates currently available, and the arrangement fees also vary from lender to lender. Once the property is habitable, some lenders permit the borrower to switch to a lower rate of interest.
(MORE: Self Build: The Complete Guide)
In order to progress your application you’ll need to provide plans and a breakdown of the potential build cost.
Use our Build Cost Calculator to find out what your dream home is likely to cost, but remember to add on the cost of your plot and a healthy contingency fund for any issues you may encounter.
Which Type of Self Build Mortgage Should I Choose?
There are two types of self build mortgage available:
- the arrears type, where stage payments are given as each stage of the build is completed. The arrears-type self build mortgage is suitable for those who have a large cash injection of their own to put into the project.
- the advance type self build mortgage, where the stage payments are released at the start of each stage of the build. This means money is available at the point of need when labour and materials bills are due — removing the need for short-term borrowing/bridging loans to cover the shortfall. The obvious advantage here is that this type of product assists cash flow and is generally better suited to those who do not have large pots of savings to fund the build as it progresses. There are fewer lenders who offer this facility though; try BuildStore.
Some lending institutions lend on the land purchase or existing property and at key stages during and on completion of the build project.
This can vary from:
- 75-80% of the purchase price or valuation (whichever of the two is the lower)
- up to 80% of build costs
- up to 75% of the growth in value of your project at key stages during construction.
Some lending institutions do not lend on land, but they will lend during the build period.
Products available include:
- discount from standard variable rate of interest
- fixed rate of interest
- bank base rate tracker
Interest Rates on a Self Build Mortgage
Interest rates on a self build mortgage are higher than standard house purchase/remortgage rates and typically vary from 4-6% per annum. The arrangement fees also vary depending on the broker or lender. You may be tied into the lender for between one and three years, again lender and product dependent.
Once the property is habitable and this has been confirmed by a RICS’ qualified surveyor and issue of the building control completion certificate, some lenders permit the borrower to ‘switch’ to a lower rate of interest during the ‘tie-in period’ without incurring penalty interest.
How Much Can I Borrow with a Self Build Mortgage?
The amount you can borrow will depend on your unique financial circumstances — your income and outgoings (and any outstanding debts) will be used to establish how much you can borrow. Banks and building societies apply an affordability calculation to assess your borrowing limits.
A mortgage will not be granted if it is deemed not to be affordable.
Mortgages of this type are regulated by the Financial Conduct Authority.
What Should I Consider Before Applying for a Self Build Mortgage?
Where you intend to live while you build will have an impact on your affordability to borrow monies to build your dream home. For instance, the monthly rental payments or mortgage payments will have an impact on your affordability calculation.
Some lenders will accept you making upfront rental payments, which will not have an impact on your monthly income versus expenditure.
It's also worth noting that some lending institutions will not lend on certain types of construction, so do ensure you check with them. Of course, all your design and construction methods will need to be compliant with the current Building Regulations.
Each lender’s criteria are different, but you do need to ensure they are aware of your build type and of any payment terms and conditions your supplier has stipulated.
Some lenders require that you must work to a fixed build cost budget; others may request that a qualified quantity surveyor provides the information on the build costs. Check with your lender what they require. Also, ensure that you include a minimum of a 20% contingency built into your build cost estimate.
In addition, as part of your full project costs and budget control estimate that you provide your lender with, you’ll need to identify (or at the very least estimate) the following costs:
- Land purchase and associated fees
- Project management, including health and safety compliance
- Gaining planning consent, if not already achieved, and associated fees
- Demolition and/or site preparation
- Construction design fees
- Construction costs (preferably estimated against Building Regulations drawings).
You must demonstrate to the lender that you will have sufficient funding ability and competence in place to complete the project.
What Documentation Do I Need for a Self Build Mortgage?
The supporting documentation required is essentially the same as a standard mortgage. However, additional supporting documentation will be required, which may include:
- Copy of planning permission
- Copy of construction drawings and specifications
- Copy of total project cost estimate (where possible, fixed-price contracts)
- Copy of Building Regulations approval
- Copy of site insurance and structural warranty
- Architect’s professional indemnity cover (if required)
- SAP calculation (this will be in the Building Regulations package)
- Experian credit report.
An initial valuation will be carried out to establish current value and anticipated end value, too. (You will be required to pay the valuation fees.) Interim and final valuations will also be requested and carried out by a RICS valuer.
The reports will be presented to the lender to evidence the increase of the interim value(s) prior to interim and final release of funds from the lender.
Other key points to consider, include:
- A typical timescale for processing a stage release mortgage is up to three months
- Consultants, brokers, banks and building societies will carry out a forensic analysis of all supporting documents
- In particular, they will focus on income and expenditure cross checked with the bank statements
Best Self Build Mortgage Deals
|Lender||Contact||Max LTV on Land||Stage required for first payment||Max LTV during construction||Final LTV land and building|
|Beverley BS||01482 881510||Not on land||Negotiable||Max 75%||Negotiable|
|Buckinghamshire BS*||0345 223 4888||Max 70%||Land||Max 70%||Max 70%|
|Chorley BS*||0345 223 4888||Max 85%||Land||Max 85%||Max 80%|
|Darlington BS*||0345 223 4888||Max 70%||Land||Max 70%||Max 70%|
|Earl Shilton BS||01455 844422||Max 75%||Land||Max 75%||Max 75%|
|Ecology BS||01535 650770||Max 80%||Land||Max 80%||Max 80%|
|Halifax||0345 727 3747||Not on land||1st floor level||Max 80%||Max 80%|
|Hanley Economic BS▲||0345 223 4447||Max 75%||Land||Max 75%||Max 80%|
|Hanley Economic BS*||0345 223 4888||Max 85%||Land||Max 85%||Max 80%|
|Hanley Economic BS||01782 255000||Max 80%||Land||Max 80%||Max 80%|
|Ipswich BS||0330 123 0773||Max 75%||Negotiable||Max 75%||Max 80%|
|Loughborough BS||01509 631950||Max 80%||Land||Max 80%||Max 80%|
|Mansfield BS*▲||0345 223 4888||Max 85%||Land||Max 85%||Max 85%|
|Newcastle BS*||0345 223 4888||Max 85%||Land||Max 85%||Max 85%|
|Nottingham BS*||0345 223 4888||Max 75%||Land||Max 75%||Max 80%|
|Penrith BS||01768 863675||Max 75%||Land||Max 75%||Max 75%|
|Progressive BS||028 9024 4926||Not on land||Footings||Max 70%||Max 75%|
|Saffron BS||0800 072 1100||Max 80%||Negotiable||Max 80%||Max 80%|
|Scottish BS||0131 313 7700||Max 60%||Land||Max 80%||Max 80%|
|Stafford Railway BS*||0345 223 4888||Max 85%||Land||Max 85%||Max 75%|
|The Melton BS||01664 414141||Max 75%||Land||Max 75%||Max 75%|
|Ulster Bank||www.ulsterbank.com||Not on land||1st floor level||Max 80%||Max 80%|
|Vernon BS||0161 429 6262||Max 75%||Land||Max 75%||Max 80%|
▲ via Intermediaries through BuildLoan.* through Buildstore Financial Services. Royal Bank of Scotland offers finance via a bridging loan facility. Ecology BS will lend on ecologically-designed houses only. Restricted lending areas may apply. Figures compiled on 30 July 2020. Source: Moneyfacts.co.uk
What If I Don’t Want a Self Build Mortgage?
If you own your existing home or have enough equity in it, you may be able to remortgage or take out a bridging loan to pay for your new plot, fund the build costs, or even both. You would then sell your old house once you had completed the new one and pay off the loan.
Bridging loans are a more expensive way to borrow money for a building project — ranging from 0.59% to 1.5% per month and the arrangement fees can be quite high; between 1% and 2% of the total borrowing facility. This can be with or without incurring exit fees.
Rachel Pyne of Buildstore adds: “It’s important to note that a regulated bridging loan secured on your main residence has a maximum term of 12 months. This means you must complete your new home and sell your old one in this time to repay the loan.”
When Are Funds Released?
Funds are typically released as following key stages:
- Land (with the minimum of outline planning consent)
- Wallplate/eaves height (just before the roof trusses go on)
- Wind and watertight roof tiled
- First fix
- Second fix
- Certified completion
Renovation or Conversion
- Purchase of existing structure
- Inspected completion of structural survey and cost estimate of necessary works
- Completion of load bearing elements
- First fix
- Second fix
- Certified completion
Custom Build or Group Self Build
- Purchase of land
- Associated preliminary costs and substructure
- Construction to wind and watertight stage
- First fix
- Second fix and completion
The Important of Site Insurance and Structural Warranties
A bank or building society may not release initial funds until you can demonstrate that you have a 10-year structural warranty policy in place. When taking out your warranty, it’s also a good time to ensure that you have the right site insurance policy in place to give you peace of mind should anything go wrong.
Such policies are offered by providers such as:
- Self Build Zone
- Q Assure Build
- NHBC Solo
- Premier Guarantee
Anyone undertaking a build project, whether borrowing or not, should have both in place prior to starting work on site.
Subject to affordability, banks and building societies are keen to lend on residential construction projects, providing you have carried out due diligence and engaged the appropriate team(s) to achieve the successful construction of your new home.
(MORE: Self build warranties).
What Happens When I Finish the Build?
"In order to keep costs down, some lenders allow mortgages to be repaid on an interest-only basis during the build period," says Emma Lunn, a journalist specialising in personal finance and property.
"But once the property is complete, habitable and valued, and this has been confirmed by a RICS-qualified surveyor, you’ll be prompted to remortgage to a mainstream mortgage deal. This will be better for you as interest rates will
"Most lenders will offer a product switch at the end of your build onto a mortgage product with a lower rate. You should, however, watch out for any early repayment charges and talk to a broker to find you the best deal."
[MORE: How to build a house for under £150k!]
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