What could be more fulfilling than building your own home from the ground up? It’s a dream of many, and the very first hurdle to overcome is the process of planning and budgeting for the project. If you are set on building your own home, you will likely need to secure a self build mortgage to finance your project, as a normal residential mortgage will not be sufficient.
The nature of your self build is entirely up to you. Chances are you’ll have to recruit certain professionals like an architect and tradespeople to sort out your gas and electrics. You may wish to take on a building company to manage and execute the entire project on your behalf. Regardless of your choices, a self build mortgage is designed to fund a self-build project for anyone who doesn’t already possess the funds to finance it themselves.
A mortgage for a self-build is a niche category in finance, so you won’t find much information about it from high-street lenders. Think Plutus specialise in helping borrowers secure mortgages for self-build projects so get in touch today to start things moving and we’ll help you through the process of securing the best possible self-build mortgage.
What is a self build mortgage?
A self build mortgage is a product designed for people who wish to build their own home. Unlike a traditional mortgage, funds are not released in a single lump sum – instead, the funds are released at pre-determined stages of the build.
There are self build mortgage lenders who will fund the plot purchase as well, but many will not. Interest rates are often higher than with standard house purchase rates, with varying arrangement fees. Once the property is deemed habitable, certain lenders will allow the borrower to move onto a lower interest rate. Applications for this mortgage type will need to include detailed plans and a breakdown of the projected build cost. This will include the cost of the plot and the provision of a substantial contingency fund in case the project encounters any issues.
There are different types of self build mortgage available. Our specialist advisers at Think Plutus can help you understand what’s available, but we’ll try to lay out the basics here.
Which is the best self build mortgage for me?
Essentially, there are two types of self-build mortgage to choose between:
Arrears: In this type, stage payments are released as the project progresses from one stage to the next. An arrears form of self-build mortgage is best suited to borrowers who have a hefty amount of capital that they can put into the project.
Advance: With this type, the stage payments are released at the beginning of each build stage. This means the money is made available at the point when the initial costs of labour and materials need to be paid. This eliminates the need for any kind of short-term borrowing, bridging loans or personal savings to cover things. This type of self-build loan gives the advantage of assisting more with cash flow, but there are fewer lenders that accommodate it.
Some lenders will also lend on the purchase of a plot of land or an existing property, as well as those key stages of the build itself. The amounts will vary, but will usually fit into the following:
- 75-90% of the valuation or purchase price (whichever is lower)
- 80-90% of the build costs
- ~75% of the growth in value of the project at predetermined stages of construction
Be advised that many lenders will not lend on the land – they will only cover the build period. Deals will include things like:
- fixed interest rates
- discounts from the standard variable interest rate
- bank base rate trackers
The stages where the funds are released will depend on the plans and the lender, but some common stages are as follows (a surveyor will confirm the move from one stage to the next):
- Buying the land
- Laying the foundations
- First-floor joists
- Wall plates
- Roofing applied, so the property is wind and watertight
- Plastering of interior walls
Our specialist advisers at Think Plutus can answer any questions you may have about anything you read here.
What are the interest rates for self build mortgages?
You should expect a higher interest rate on a self-build mortgage than a standard house purchase or remortgage rate. Typically, the rates available range from 4-6% per annum. There will also be variation in arrangement fees depending on the lender or broker you go with. You may find yourself tied to the lender for 1-3 years – again, it will depend on the lender and the product.
Once the property is deemed habitable by a RICS qualified surveyor and the issuing of a building control completion certificate, some lenders will allow borrowers to switch to a lower interest rate. There will be special conditions that protect against incurring penalty interest during this switch.
Think Plutus can help you find the lender offering the best rates whose mortgage product fits your needs. It helps to have expertise in your corner, especially when those experts have access to the full mortgage market.
How much will I get with a self build mortgage?
The amount a lender will provide depends entirely on your financial situation. Lenders will asses your income and outgoings, as well as any outstanding debts you may have. They will use this to establish how much you can borrow without the level of risk going above a certain threshold. Affordability calculations will ascertain your borrowing limits, and if you are deemed unaffordable you will not be granted a mortgage.
What other considerations are there with a self build mortgage?
Where will you live whilst work is in progress?
Your living arrangements during the build will impact on your affordability for a self build mortgage. If you have monthly rental or mortgage payments, your affordability will be affected. Some lenders will accept you making rental payments upfront without impacting your projected income versus expenses.
What build system are you planning?
Some lenders do not include certain types of construction in their criteria, so it’s important to approach the right lender. Your design and build methods will need to be fully compliant with Building Regulations. Lenders have differing criteria, but they will all need you to be open about the build type, and any payment terms and conditions of your suppliers. Don’t confirm a payment schedule with builders or suppliers until you know exactly how your lender will be releasing your funds.
What’s your projected build cost?
Many lenders will ask you to provide a fixed budget for the build costs, while others will insist that a quantity surveyor provides this information. Think Plutus can help you to understand the requirements of your lender. It’s important to include a 20% or higher contingency budget in your cost projections.
Don’t forget that, though a self-build will save you having to pay stamp duty, there are other costs to consider. These include:
- Planning permission
- Building regulations
- Unexpected issues
- Paying contractors/builders
- Architect fees
- Legal fees
- Broker fees
What documentation is needed for a self build mortgage?
In essence, the key supporting documents you must supply are the same as with a standard residential mortgage. However, lenders will need to see additional supporting documentation. This can include:
- A copy of the planning permission
- Copies of construction drawings and specifications
- A copy of the projected costs of the build
- Confirmation of Building Regulations approval
- Evidence of site insurance and structural warranty
- Professional indemnity cover for architect
- Credit reports
A formal valuation will be carried out to identify the current value and the anticipated value of the property upon completion. You will have to pay the valuation fees, and there will also be interim and final valuations requested, which will require a RICS valuer to carry out.
All the reports will be presented to the lender as evidence of value(s) before the lender releases any funds. Once again, the borrower will pay the valuation fees. The processing of a stage release mortgage typically takes up to three months. All supporting documents will be scrutinised by consultants, brokers, building societies and banks. There will be a particular focus on income and expenditure alongside bank statements.
It can be intimidating to compile and present all this data, and it is strongly advised that you make use of an experienced mortgage adviser to help ensure you approach the right lender in the right way for your circumstances. Contact Think Plutus to arrange a consultation to assess your situation and identify the best way to move forward.
What alternatives are there to a self build mortgage?
If you already own a property outright, or have sufficient equity in one, it may be possible to remortgage or take out a bridging loan to pay for a new plot and perhaps even fund the building costs. Upon completion of your project, you could sell the old property to pay off the loan. Bear in mind, however, that a bridging loan secured on your home will have a maximum term of 12 months. You will need to complete your new build and sell your old home within this timeframe to pay off the loan.
Structural warranties and site insurance
Many banks and building societies will not release the initial funds until you show evidence that you have a 10-year structural warranty in place. When you take out this warranty, this is a good time to make sure you put the appropriate site insurance policy in place. This will give you peace of mind in the event that something goes wrong.
There are various insurers who offer these types of policy, including:
- Q Assure Build
- Self Build Zone
- NHBC Solo
- Premier Guarantee
Whether or not you are borrowing, if you are undertaking a build project, you should have your structural warranties and site insurance in place before any work is done.
Self build mortgage specialists
Self Build mortgage lenders are keen to lend on residential construction projects, but a great deal of due diligence must be done. Building your own home is a complicated and challenging project that requires a huge amount of planning and organising. You don’t want to be hampered by the process of finding the right deal to finance your build. Think Plutus has access to specialist lenders and we can prepare your application appropriately before making an approach, boosting your chances of being approved.
Experience in this complex field is invaluable, and our expert mortgage advisers will be able to answer any questions you may have. For expert advice and guidance on securing the self build mortgage that will make your dream a reality, Think Plutus.