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Self-Build Mortgages

Building your own home is becoming increasingly popular, and there are specialist mortgages available to help purchase the land and fund the associated construction costs. These apply whether you intend to carry out your own build project or take on a contractor to complete the construction to your specification.

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Mortgages for self-build projects

The difference between a self-build and a normal residential mortgage is that a self-build mortgage provides funding in stages at each stage of the build process. Each lender has their own process, but typically an initial lump sum is released to purchase the land, and further instalments are released at key stages of the build. For example, a proportion of the mortgage is released when each floor is completed, key parts of the structure are finished and when the build has been completed. These instalments are referred to as tranches, and lenders either release each tranche after the next stage of the build has been finished, or less commonly beforehand. Usually, an independent surveyors report will be required to verify the stage of the build that has been achieved.

Types of self-build mortgage

Some mortgages provide funds upfront to purchase initial materials or release down payments to contractors. It is vital to consider your cash flow requirements throughout the self-build project before deciding on the right mortgage lender for you. Self-build mortgages are available for any type of self-build, generally brick or timber frame buildings. If you are considering an innovative project or using unusual materials, you may require a niche lender.

Examples of the stages at which each tranche of funding is released could include:

  1. The purchase of the plot of land
  2. Initial completion of foundations
  3. Framework erected
  4. Property is made water and windproof 
  5. The initial interior is completed
  6. Project is completed

Funding a land purchase

Mortgages are available to purchase a plot of land and are usually dependant on the right planning permission being in place. Lenders can finance varying values of the land – typically between 50-75% of the value of the plot. If you have existing finances available to fund part of the project, it is usually most cost-effective to save these funds for the building project, since this helps to reduce the number of tranches required and expedite the mortgage process whilst minimising fees.

Self-build mortgages – the good and the bad

Advantages:

  1. Usually lower cost to build your property than to purchase a ready-made equivalent 
  2. Lower stamp duty, since this is payable only against the land purchase
  3. No stamp duty is payable if the plot of land costs less than £125,000

Disadvantages:

  1. Mortgage fees and interest rates can be higher than standard residential mortgages
  2. A higher deposit is required, usually from 25% of the build project cost
  3. Detailed plans and planning permissions are required for mortgage lenders for self-build mortgages
  4. Additional accommodation costs during the building project

Interest rates for self-build projects

Depending on the lender usually self-build mortgages carry higher interest rates than residential mortgages, so choosing the right scheme is essential. The ideal scheme will not carry penalties, and allow you to remortgage once the build is complete. Using a mortgage advisor, such as the team at Revolution Finance Brokers, has the advantage of providing access to the most competitive schemes on the market, as well as the negotiating power to achieve the most advantageous rates and terms.

Lenders of self-build mortgages

Self-build mortgages are a specialist product and should be selected from the smaller number of lenders who offer this type of mortgage. Here at Revolution Finance Brokers we have extensive experience in securing self-build mortgages, and would be delighted to help you get your project off the ground! If you aren’t sure which lender to choose, don’t know what sort of self-build mortgage is right for you, or need support in planning the budget for your dream home, give us a call today.

FAQs

What are the advantages of a self-build mortgage?

Building your own home comes with the advantages of being able to design, create and construct exactly the home you have in mind. It can also be significantly cheaper than buying an established property. Another benefit is the lower stamp duty payable, since this is liable only against the cost of the land, and not against any of the costs of the build or materials.

What are the disadvantages of a self-build mortgage?

The main difference between traditional and self-build mortgages is that self-build mortgages deliver portions of funding at key stages of the project, rather than all at once. The interest costs associated with self-build mortgages also tend to be much higher.

What sort of interest rates can you expect to pay on a self-build mortgage?

Whilst self-build mortgages tend to be more expensive than standard mortgages, the actual rates and terms offered will vary between lenders and applicants. Given the expectation of higher interest rates, it is essential to make sure your self-build mortgage does not carry penalties for remortgaging, and allows you the freedom to remortgage at a preferable rate once the build is complete.

Check out our handy calculators

Our quick mortgage calculators are designed to give you an indication of how much you can borrow and allow you to consider the different mortgage options available to you.

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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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