If you are not fortunate enough to be able to build a home using savings, or with the funds from the sale of your previous home, you will need to borrow some money to finance your build. This is where a self build mortgage will come in handy.
What is the difference between an ordinary mortgage and a self build mortgage?
They’re just the same and a self build mortgage can exist in all of the same varied forms as an ordinary mortgage, from repayment to interest only.
The thing that differentiates a self build mortgage from any other mortgage is in its operation and the existence of stage payments. If there are no stage payments during the build or if those stage payments are positioned so far back in the build process as to make them meaningless, then it’s not a self build mortgage.
To be a true self build mortgage, the payments must also take in the land purchase stages.
There are two types of self build mortgage: the arrears type, where the stage payments are given as each stage of the build is reached, and the advance type, where the stage payments are released at the start of each stage of the build.
The arrears-type self build mortgage is suitable for those who have a large cash injection of their own to put into the project. For those on shorter means, this kind of mortgage can lead to cash shortfalls during the build and delays whilst they wait for a fresh cash injection. Additionally, many lenders giving this kind of self build mortgage will typically only release 75% of the costs during the build period and will keep a retention of the loan amount until the project is finished.
The advance stage payment mortgage means that the money is in their bank and, therefore, available at the point of need when labour and materials bills fall due — removing the need for short-term borrowing/bridging loans to cover the shortfall. Typically the advance payment mortgages give up to 90% of the value of the land, plus 90% of the building costs, up to a maximum of 90% of the eventual value of the home, subject, of course, to the borrower’s income status. Money is typically released at six stages, starting with land purchase, through foundation work, wall plate level, watertight, and so on.
Rates for self build mortgages are typically at the higher range of levels you might expect for a regular mortgage.
When are the fees due?
Self build mortgages tend to have slightly higher charges than regular house mortgages. You might reasonably expect to pay £1-2,000 to set up a self build mortgage by the time application fees, broker fees and completion fees have been taken into account. On the arrears stage payment mortgage, an interim valuation is required at each stage before funds are released.
An advance stage mortgage does not require interim stage valuations but there are additional costs in getting the money in advance. This cost depends to a degree on the amount of additional cash-flow required and the amount that the self builders are putting in.
Are there any penalties for early repayment?
There can be early repayment charges imposed on some mortgages – typically 2-3% of the total loan if you want to repay within a couple of years. If you’re likely to find yourself in this position then be sure to inform your mortgage advisor at the outset, before signing anything, so that they can tailor the right package for you.
This article was updated in December 2013