Self-build mortgages offer financing to build your own property from the ground up, with options to deliver funding in tranches as construction progresses.
Designing and constructing self-builds has become significantly more popular, primarily because it can be more cost-effective to purchase a plot of land and build a property to your specification, and you have complete autonomy over the materials, style and layout.
Mortgage financing works differently from a conventional mortgage because the borrowing needs to cover the cost of paying contractors, purchasing materials, possibly buying the initial land, and covering contingencies.
However, a self-build mortgage product can be efficiently structured to release funding at key stages of your build, with the potential to remortgage or switch to a lower interest rate product once the construction is complete.
The Basics of Self-Build Mortgages
Unlike residential mortgages, a self-build mortgage does not release 100% of the agreed borrowing upfront. Instead, you submit a schedule of works, which sets out milestones in the build process.
The lender will inspect the property to verify that the work has been completed and will usually have an appointed surveyor who will visit periodically and confirm that the construction meets all the requisite building standards.
Self-build lenders are fairly active in the process because it is in their interest to ensure the build is of satisfactory quality. They need to ensure they do not release funding against a project that would be worth less should they end up in a repossession scenario.
Some of the factors to consider before applying for a self-build mortgage include the following:
- Submitting detailed plans, budgets and breakdowns, showing the cost of every element of the building project.
- Allowing for a contingency in your requested amount, normally adding a 15% to 20% buffer to ensure you have enough funding to cover any unexpected costs.
- Interest rates will normally be higher than for a standard mortgage, and arrangement fees often apply – but once the property is habitable, you may be able to switch to a lower interest rate product.
This type of mortgage is a niche borrowing product and is unlikely to be available through a mainstream mortgage lender or high street bank. The application and underwriting process is also very thorough, so we always recommend getting in touch with Think Plutus for support and guidance along the way.
Types of Self-Build Mortgage Products
Every self-build mortgage is customised to your plans and necessary borrowing amount, and there are two types of self-build mortgages to choose between.
Arrears self-build mortgages release funding at stages throughout the build process after the surveyor has confirmed that the work has been completed and is to a good standard.
The issue with an arrears self-build mortgage is that you receive the financing once you have completed – and paid for – the work, so you need considerable savings or other capital to finance your cash flow.
Advance self-build mortgages release payments in stages but at the start of each phase in the build, which means you use the mortgage financing to pay for materials and labour before the next step.
Self-build borrowers who do not have the funds to pay for work upfront are better suited to this type of product because it ensures they do not rely on bridging loans or other high-interest short-term borrowing to avoid delays.
Fewer self-build lenders will consider an advance mortgage product, but they are a possibility.
Buying a Plot of Land for a Self-Build
If you do not already own the land on which you wish to build, you may want to include this cost in your self-build mortgage application.
Again, the terms vary between lenders, but some will allow you to factor in the purchase of the land or an existing property if you intend to demolish it or build a second home on the same site.
As a rule of thumb, self-build lenders will normally offer up to the following:
- 75% to 90% of the cost of the land or the valuation of the plot.
- 80% to 90% of the construction costs.
- Roughly 75% of the calculated final property value, or the estimated value, at the end of each construction phase.
The majority of lenders will not include the land in the mortgage lending, but some may, with interest rates varying between the usual fixed-rate, tracker and discounted products.
Funding Release Stages for Self-Build Mortgage
Your milestones and key phases in the build will depend on the project plan and are usually things you will need to discuss with your architect or project manager.
The general points at which you might need to draw down the next tranche of mortgage finance may include:
- Purchasing the plot of land – depending on the lender.
- Groundwork and preparing the foundations.
- Fitting the joists for the first floor.
- Installing wall plates and the initial internal structure.
- Roof installation and making the property safe from water and wind.
- Plastering the interior walls.
- First and second fixes, installing electrics and plumbing.
- Completion and addressing any snagging points.
The team you hire to manage your self-build can influence your mortgage application. You might decide to project manage your own build, but most lenders prefer to see applications with an experienced construction manager or architect.
Expertise and a track record of previous successful builds can go a long way to offset the lender’s risk exposure, so having a reputable contractor behind you is beneficial.
Self-Build Mortgage Interest Rates
Self-build mortgages are a specialist borrowing product, and you will usually pay a higher interest rate than you would expect on a standard remortgage or residential mortgage.
Think Plutus can steer you through the factors affecting your interest rates, comparable arrangement fees and the lenders most likely to approve your application.
Most self-build mortgages have a term of between one and three years, with varying options to extend or bring forward the completion date as your build progresses. It is far from unusual for a self-build to take longer than anticipated, so flexibility can be an essential element in choosing the right lender.
Although a self-build mortgage is relatively high interest, most lenders will be happy to refinance the loan on a regular residential mortgage at a lower cost once the property is completed and signed off by a qualified surveyor.
General Lending Criteria for Self-Build Mortgages
Of course, every lender has different terms and policies, but some general criteria apply to most residential self-build mortgages.
Because this is a residential loan, the products available are all subject to Financial Conduct Authority (FCA) regulatory conditions. A lender must run through assessments to check your eligibility and affordability.
Lenders will wish to look at:
- The location of your intended build and the projected future valuation or rental income available from the completed property.
- Whether you intend to live in the property, sell it, or use it as a rental investment.
- The construction methods you wish to use and the qualifications and experience of your contractors, project managers and architect.
- How your intended construction systems comply with current Building Regulations rules.
- Your budget, the level of detail in your planning, and whether a quantity surveyor has verified that your projected costs are accurate, with a contingency built in.
- Provisions for site health and safety management.
- The cost or value of the plot of land and any associated fees.
- Whether you have full planning permission and the likelihood of this being granted, as well as the costs.
The more accurate and detailed your plans, the better your chances of approval, so it is highly advisable to work with an experienced self-build mortgage broker to assess your application and supporting evidence before applying.
Affordability assessments will include an analysis of your income, outgoings, and other pre-existing debts, outside the self-build project.
Lenders need to verify that you have the earnings to cover your mortgage payments and are not likely to become unable to keep up with the costs either during or after the construction work.
Documentation Required to Apply for a Self-Build Mortgage Product
Much of the documentation is similar to a standard mortgage, but you will need to provide supplemental paperwork in addition to your budget, construction drawings and planned work schedule.
Lenders may request a copy of your self-build insurance and evidence of a 10-year structural warranty, along with a copy of your architect’s professional indemnity insurance coverage.
They will also need to arrange an initial valuation to establish what the site is currently worth and confirm whether your projected future valuation is fair. Most lenders will instruct their own appointed surveyor whether or not you have already had an independent survey conducted.
Alternatives to Self-Build Mortgages
If a self-build mortgage is not right for you, or there is an aspect of your planned build that makes it difficult to meet the relevant eligibility criteria, you can use alternative forms of financing to cover the construction costs.
The suitable options will depend on whether you already own the land or another property and the equity you have – in some circumstances, a remortgage may be the most convenient and affordable solution.
Bridging loans may also be suitable, although these short-term loans normally run for up to one year. A bridge loan will only be a viable alternative if your build is going to be finished well within that time frame.
We may be able to suggest other borrowing options after a brief consultation to understand the scenario, how much you wish to borrow, and your other financial circumstances – you are welcome to submit an enquiry form or give us a call if you would like further information.
Expert Advice on Specialist Self-Build Mortgages
Self-build mortgages are usually the best way to finance the cost of building a residential property. Although lenders need to see appropriate due diligence, budgeting and planning beforehand, these products allow you to structure your financing against your construction schedule.
Think Plutus provides access to a broad network of specialist lenders, including those who do not accept direct applications, with competitive interest rates, flexible terms and a range of options in terms of repayment periods.
Please get in touch at your convenience if you require any advice about financing a self-build, selecting the most suitable lender, or comparing self-build mortgage products to ensure your completed home is as cost-effective as possible.
Self-Build Mortgages: Frequently Asked Questions
The FAQs below answer some of the commonly asked questions the Think Plutus team receives about self-build mortgages.
What Happens With a Self-Build Mortgage After the Build is Finished?
Most lenders will allow you to remortgage the lending onto a residential mortgage once your construction project has ended and been signed off by the surveyor.
You may also wish to explore the option of having an interest-only self-build mortgage, which can be a useful way to keep your costs down while the build is ongoing.
Early repayment charges can sometimes apply to a self-build mortgage, so it is important to check the terms carefully and ensure the product you apply for meets your requirements.
Would I Be Better Off With a Self-Build Mortgage or a Bridging Loan?
Both of these borrowing products are feasible ways to finance the cost of a build, but a self-build mortgage is specifically designed to provide structured financing to help you construct your own home.
Bridging loans can be used to buy a plot of land and fund construction, but they are usually more expensive in terms of interest rates as a short-term product.
Most bridge loans for residential borrowers have a maximum 12-month term, which means you would need to complete your build and repay the loan within one year, which is not often a suitable time scale.
Another aspect to consider is that if you borrow a bridging loan, you will accrue interest on the total balance every month of the build. In contrast, on a self-build mortgage, you normally only pay interest on the funding drawn from the approved facility.
What Insurance Do I Need to Take Out a Self-Build Mortgage?
Lenders will confirm their exact criteria and lending policies before they approve a self-build mortgage. Still, the minimum is normally to have a structural warranty insurance policy valid for at least ten years.
Warranties may also depend on self-build insurance, which provides protection if something goes wrong.
Can I Get Help With the Costs of a Self-Build Mortgage?
You can indeed – the Help to Build scheme is a government-backed initiative open to applicants in England who can take out an equity loan towards a self-build project.
The scheme offers loans of between 5% and 20% (or 40% in London) of the total anticipated cost. Eligible builds can have a budget of up to £600,000, including the cost of the land where applicable.
Get in touch if you require more guidance about Help to Build and using this as an element of your self-build financing.