It’s highly likely when building your own home that you are going to have to borrow some money in the form of a self build mortgage.
While a traditional residential mortgage will release funds in one lump sum upon completion, with a self build mortgage funds are released at key stages of the build project.
You will typically need a specialist self build mortgage provider, but before your first meeting you will need to assess your existing financial situation to help determine how much you could borrow.
You might also find it useful to 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 the stage payments are given as each stage of the build is reached
- 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.
The advance stage payment mortgage means that the money is in their bank and 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.
Disadvantages of Advance Stage Payment Mortgages
- The cost of borrowing is generally higher than other arrangements due to the level of ‘risk’
- Very few lenders offer this facility too
- Currently advance funding may only be secured on a Single Premium Policy, which provides additional security to the lender. The cost of this premium is high
- 10% of total borrowing will be retained until Building Control has issued a completion certificate
Have an open dialogue with all of your contributors to ensure the lender’s stage release funding model is compatible with their payment terms.
Cash flow management is critical.
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:
- 75-90% of the purchase price or valuation (whichever of the two is the lower)
- up to 80-90% 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/re-mortgage rates and vary from 4-6.5% per annum. The arrangement fees also vary from lender to lender. You may be tied into the lender for between one and three years, again lender and product dependent.
Bridging loans are more expensive 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. You may be tied into the lender for between one and three years, again lender and product dependant.
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.
- Consultant and/or broker fees will vary
- Beware of hidden fees
How Much Can I Borrow with a Self Build Mortgage?
As a guide to help you gauge your potential borrowing facility, the income multiplier may be:
- Single application: up to 4.5 times the single income
- Joint mortgage application: up to 4.5 times the highest salary, plus second applicant’s salary, or 3.5 times joint income
Banks and building societies apply their own affordability calculation to assess your borrowing limits.
You also need to check your own affordability. Would your net monthly disposable income enable you to borrow funds based on a stress test rate of interest of up to 7.5% on a capital and interest basis (repayment)?
A mortgage will not be granted if it is deemed not to be affordable.
Are These Mortgages Regulated?
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.
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 the payment terms and conditions your supplier has stipulated.
Do not agree any payment schedule with your builder or suppliers until you know how your lender will release funds to you.
What’s Your Estimated Build Cost?
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.
(MORE: Use our free build cost calculator to estimate your build costs)
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.
Additional supporting documentation required will typically 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. Again, you, the client, will pay the valuation fees.
- 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
Where Can I Get a Self Build Mortgage?
Some high street banks offer self build mortgages but there are many companies who specialise in mortgages for this type of project.
Best Self Build Mortgage Deals – June 2019
|Lender||Max LTV on Land||Stage required for first payment||Max LTV during construction||
Final LTV land and building
|Beverley BS||Not on land||Wall plate level||Max 75%||Negotiable|
|Buckinghamshire BS*||Max 85%||Land||Max 85%||Max 80%|
|Chorley BS*||Max 85%||Land||Max 85%||Max 80%|
|Cumberland BS||Max 75%||Negotiable||Max 75%||Max 85%|
|Darlington BS*||Max 70%||Land||Max 70%||Max 70%|
|Earl Shilton BS||Max 50%||Land||Max 75%||Max 75%|
|Ecology BS||Max 80%||Land||Max 80%||Max 80%|
|Halifax||Not on land||1st floor level||Max 80%||Max 80%|
|Hanley Economic BS▲||Max 75%||Land||Max 75%||Max 80%|
|Hanley Economic BS*||Max 85%||Land||Max 85%||Max 80%|
|Hanley Economic BS||Max 80%||Land||Max 80%||Max 80%|
|Ipswich BS||Max 75%||Negotiable||Max 75%||Max 80%|
|Loughborough BS||Max 80%||Land||Max 80%||Max 80%|
|Mansfield BS*▲||Max 85%||Land||Max 85%||Max 85%|
|Melton Mowbray BS||Max 85%||Land||Max 85%||Max 75%|
|Newbury BS||Max 66%||Land||Max 75%||Max 75%|
|Newcastle BS*||Max 85%||Land||Max 85%||Max 85%|
|Nottingham BS*||Max 75%||Land||Max 75%||Max 80%|
|Penrith BS||Max 50%||Land||Max 75%||Max 75%|
|Progressive BS||Not on land||Footings||Max 70%||Max 75%|
|Saffron BS||Max 65%||Negotiable||Max 75%||Max 75%|
|Scottish BS||Max 60%||Land||Max 80%||Max 80%|
|Stafford Railway BS*||Max 85%||Land||Max 85%||Max 75%|
|Ulster Bank||Not on land||1st floor level||Max 80%||Max 80%|
|Vernon BS||Max 75%||Land||Max 75%||Max 80%|
|West Brom BS▲||Max 85%||Land||Max 80%||Max 75%|
▲ 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. 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.
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?
- 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
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).