Paul Welch of largemortgageloans.com walks you through the key tips for success in playing the self-build mortgage game
You have secured your plot, lined up your construction team, and your planning permission has been granted. But what about funding?
Did you know that lenders in the mortgage market provide specialist self-build mortgages to those building their own homes? From building societies to private banks, there are a variety of avenues to explore when it comes to securing the right funding. In all instances, we recommend seeking the advice of specialist mortgage brokers who have experience in supporting self-build projects.
WHAT IS A SELF-BUILD MORTGAGE, AND HOW DOES IT DIFFER FROM A TRADITIONAL MORTGAGE?
A self-build mortgage is a unique loan type, designed to finance the construction of a new home. Unlike traditional mortgages that release the entire loan amount upfront, self-build mortgages release funds in stages through the construction process, ensuring funds are available when needed and agreed upon by the monitoring surveyor.
WHO IS ELIGIBLE FOR A SELF-BUILD MORTGAGE IN THE UK?
To be eligible for a self-build mortgage in the UK, you must be a UK resident, have a detailed construction plan, have the appropriate planning consent for the project and be supported, typically, by a professional project manager.
Eligibility also depends on credit history and affordability. Applicants must demonstrate sufficient income to cover mortgage repayments and living expenses during construction. You will also need a solid credit history and to meet lenders’ income requirements.
WHICH LENDERS OFFER SELF-BUILD MORTGAGES?
In the UK, several types of lenders offer self-build mortgages, catering to the unique needs of individuals building their own homes. These lenders include:
- Building societies – many building societies provide self-build mortgages, with some even specialising in this type of loan. Building societies are often more flexible and willing to consider individual circumstances.
- Specialist self-build mortgage lenders – some lenders focus exclusively on self-build mortgages, offering tailored products and expertise to help borrowers successfully navigate the self-build process.
- High-street banks – a few high street banks offer self-build mortgages, though their lending criteria may be more stringent compared to building societies and specialist lenders.
- Private banks – high net-worth individuals or those seeking larger loans may find private banks more accommodating, offering bespoke self-build mortgage solutions based on the borrower’s financial circumstances.
Researching and comparing various lenders is essential to find a self-build mortgage that suits your requirements and financial situation. Working with an independent mortgage broker experienced in self-build mortgages can help you identify the best lender and secure a favourable deal.
WHAT ARE THE DIFFERENT TYPES OF SELF-BUILD MORTGAGES AVAILABLE?
There are two main types of self-build mortgages: arrears-stage and advanced-stage payment mortgages. Arrears-stage payment mortgages release funds after each construction stage are complete, while advance-stage payment mortgages provide funds at the beginning of each stage.
HOW DO MORTGAGE FUNDS GET RELEASED DURING THE CONSTRUCTION PROCESS?
Funds are released in stages based on predefined construction milestones, such as foundation completion, wall construction, roof installation and insallation of internal fittings. An independent surveyor typically assesses progress before each fund release.
CAN I APPLY FOR A SELF-BUILD MORTGAGE IF I OWN LAND OR PROPERTY I PLAN TO DEMOLISH AND REBUILD?
You can apply for a self-build mortgage if you already own land or a property you plan to demolish and rebuild. Owning the land can make it easier to secure a self-build mortgage, as it reduces the overall borrowing required and may allow for a higher borrowing limit.
WHAT ARE THE TYPICAL INTEREST RATES & FEES ASSOCIATED WITH SELF-BUILD MORTGAGES?
Interest rates for self-build mortgages are generally higher than those for traditional mortgages, usually ranging between 6% to 8%. Additionally, there may be arrangement fees, valuation fees, and other associated costs.
HOW DO I DETERMINE THE AMOUNT I CAN BORROW FOR A SELF-BUILD MORTGAGE?
The amount you can borrow for a self-build mortgage depends on your income, credit history, and the estimated construction project cost. Lenders typically offer up to 70% of the total project cost, including land purchase, construction, and finance costs.
WHAT DOCUMENTATION & PLANNING PERMISSIONS ARE REQUIRED FOR A SELF-BUILD MORTGAGE APPLICATION?
To apply for a self-build mortgage, you will need detailed plans for your project, planning permission, Building Regulations approval, and a realistic cost breakdown. Lenders may also require proof of income, credit history, and other financial documentation such as bank statements, tax returns and proof of identification.
CAN I SWITCH TO A TRADITIONAL MORTGAGE ONCE MY BUILD IS COMPLETE?
You can switch to a traditional mortgage once your self-build project is complete, and the property is deemed habitable by an independent assessor. This is known as remortgaging, and can help you secure a lower interest rate and better terms than your self-build mortgage.
BEFORE APPLYING FOR A SELF-BUILD MORTGAGE, WHAT SHOULD I CONSIDER TO ENSURE A SMOOTH CONSTRUCTION PROCESS AND FINANCIAL MANAGEMENT?
Before applying for a self-build mortgage, consider your ability to manage the construction process, your builders’ reliability, the project’s overall cost, and your financial stability. It is essential to have a well-thought-out plan, a realistic budget, and a contingency fund to manage unexpected expenses during construction.
Research and compare mortgage options, collaborate with a qualified architect, and ensure you have the necessary planning permissions. Maintaining communication with your lender throughout the process is crucial, and seeking professional advice from a specialist mortgage broker when needed.
Paul Welch is founder and CEO of largemortgageloans.com