Do you dream of building a new home to your own specifications, where you can have input and final say on everything from the size of rooms to the tiniest cosmetic details?

Whether you have the skills and expertise to design and/or build a home yourself, or intend to hire contractors to do the work, you will need a special type of self-build mortgage to fund the plot purchase and construction.

Self-build mortgage help

There are a few things to understand before we get started.

What is a self-build mortgage?

Self-build mortgages are essentially the same as residential mortgages, in the sense that you take out a loan to acquire a property. However, whereas residential mortgages release the mortgage funds as a single lump sum to purchase a property, with a self-build mortgage the lender releases the money in stages (or “tranches”) throughout the building process.

Exactly when funds are released varies from lender to lender, but common stages include an initial release to purchase the land, and further releases when the property is, for example, completed to first-floor level, completed to eaves, and when the roof is made watertight. The final tranche is released upon completion of the build. It’s common for the mortgage to operate on an interest-only basis until the final release of funds, upon which it switches to a repayment mortgage.

While all self-build mortgages release funds in stages, some lenders will release payments in advance of each build stage while, more commonly, others will pay out only after each build stage has been completed and signed off by a surveyor.

The type of self-build mortgage you take out will depend on whether you have cash upfront to buy materials or pay contractors, or will be relying on mortgage funds to meet payments.

Below are the typical stages of a self-build, whether it may be built of brick/block or a timber frame property:

Stages Brick or Block Timber Framed
Stage 1 Purchase of Land Purchase of Land
Stage 2 Pre lim costs & Foundations Pre lim costs & Foundations
Stage 3 Wall Plate Level Timber Frame Kit Erected
Stage 4 Wind & Watertight Wind & Watertight
Stage 5 1st Fix & Plastering 1st Fix & Plastering
Stage 6 2nd Fix to Completion 2nd Fix to Completion

Interest rates

While the mortgage market is very dynamic, with interest rates fluctuating and lenders introducing new deals while removing old deals regularly; it’s true to say that in general self-build mortgage rates are significantly higher than you see for traditional residential mortgages.

Despite the higher interest rates attached to self-build mortgages, they will be the means to initially bringing your new home to life. Once the project is complete and the introductory deal period has run its course, you will be able to look to remortgage elsewhere to get a better deal. It is always best to keep in contact with your mortgage adviser to ensure that a remortgage application is applied for at the earliest opportunity to avoid paying more in interest for any longer than you have to.

Self-build mortgage lenders

Self-build projects can be quite complex by nature, and you’ll find that the number of mortgage lenders who choose to offer services to this sector of the market can be quite limited. With this being quite a niche-market area, the approach is quite specialist and this, coupled with a lot less competition for customers, means providers don’t have much pressure to undercut each other, and consequently the rates and fees attached to self-build loans are higher than for customary mortgages.

As mentioned, a few high street lenders do cater to the self-build market, and you will find a few comparison charts online to give you a general picture of the landscape. However, the information available online will not give you the entire picture of what is available across the market, particularly the mortgage products offered by specialist lending companies who do not publicly advertise their services.

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Keep reading to find information on the process and for answers to some of your main FAQ’s.

You can also learn about the different types of mortgages and interest rates in our guide.

Self-build: Frequently Asked Questions

What are the advantages of self-build mortgages?

  • Being able to oversee the design and construction of your home
  • Perhaps a lower cost that it would be to purchase an equivalent pre-existing property
  • The value of the completed project may be significantly more than what you will have paid out for
  • No Stamp Duty Land Tax is owed on the cost of the building work, only on the price of the plot of land if it cost more than £125,000
  • The mortgage you are obtaining is only on the value of the land (although some lenders do allow for an assessment based on an estimated value f the finalised project)
  • You will have. smaller loan to pay back
  • Lower monthly payments or a shorter term of the loan

What are the disadvantages of self-build mortgages?

  • Self-build mortgages are usually quite expensive when compared to standard residential mortgages
  • They may have higher interest rates and associated fees
  • You may be required to put down a larger deposit than usual
  • The lenders will only release the mortgage in stages
  • Mortgage lenders will usually also need to see detailed documentation
  • You may need to cover your costs for accommodation elsewhere while your self-build project is under construction

Mortgages to buy land

The first stage of any self-build project is to find the plot of land that will suit your ambitions for the project, as well as being in the ideal location for where you want to live. You’ll want to make sure that the land has the correct planning permissions to allow for its development in the way you wish, but if it does not then you will need to talk to a planning consultant. They will be able to go over all the details and make an application to the local authority on your behalf, if you do not wish to do it yourself.

The good news is that you do not need to own the plot in order to get planning permission for it. Once you have established that permissions are in place, and you have a plan for how you will manage and complete your self-build project, you will be able to approach lenders for a mortgage to finance the land purchase and construction.

Typically, a lender will offer anything from 50% of the value of the land up to a maximum of approximately 75% (although there are rare examples of 80%) depending on your income, other financial commitments and the anticipated increase in value of the property once the project is completed. Due to the potential for unforeseen complications or delays, lenders will always want to minimise their risk, hence the requirement for a typical minimum deposit of 25% and the practice of releasing the mortgage funds in tranches as and when stages of the build are completed, rather than in advance.

Because of this, and depending on your personal circumstances, it may be more cost-effective to obtain as much mortgage on the land itself as possible and to use your own monies to fund the materials and labour costs. This could reduce the amount of stages required before the lender releases more money and therefore the additional cost of releasing monies each time a stage is reached.

The best way to find out how to most efficiently manage your time, resources and mortgage around your self-build project is to speak to a self-build mortgage broker. Get in touch with our team today and they will be able to discuss and advise you on this further.

Are there any government schemes that can help me?

In April 2021 the Government announced the funding for the 95% LTV Help to Build Mortgage Scheme, whereby it hopes to encourage and assist more people to build their own homes. The scheme is supported by £150 million in funding spread across 4 years and is hoped that it will assist between 30,000-40,000 new homes every year in the UK.

Successful applicants will be able to fund their self build project with just a 5% deposit together with a Government backed equity loan.

The scheme will work very similar to the shared equity help to buy scheme with differences being that the scheme will be based on the build cost and the government share would only be paid to the lender on practical completion. In practice the proposal would be that the self builder would secure a mortgage with a 5% deposit with the mortgage lender then providing 95% of the funding. On completion of the build the lender would then pay the 20% to the lender and in turn reduce the overall lending to 75%.

An action plan provided by the government indicates that the full prospectus will be made available in spring and applications for the scheme will be available from late summer.

Self-build mortgage advice

At The Residential Mortgage Hub, we have years of experience in helping people find and secure self-build mortgages to enable the construction of their dream home, rather than buying a pre-existing house. The process entails a careful overview of the whole project, as well as the usual assessments for affordability and credit checks.

Due to the complexity of this type of mortgage, it is vitally important to receive the right advice. Every mortgage deal carries its own terms, variations and subtleties, and you’ll want to know that each of them is the best fit for your plans and ambitions for your property. You’ll want to make sure that you’re paying as little as possible in mortgage costs and fees, but you’ll also want to understand how this might balance out with longer-term conditions around the mortgage, such that you avoid paying more than necessary over the lifetime of the loan.

Call us today to find out more about your options and discuss how we can help.

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