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Self-build mortgages


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Self-build mortgages

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Last reviewed on 18th February 2022

Building a home from start to finish is a dream for many, but what is the best way to fund a self-build project? It’s likely you’ll need a self-build mortgage, as a regular mortgage simply won’t be suitable.

The method you choose to build your home is entirely your choice. You’ll need skilled professionals such as architects and building contractors. You may hire a building company to handle the entire project for you. Whatever choices you make, a self-build mortgage can help to fund the development of your home.

A mortgage for a self-build home is a niche type of finance, so there aren’t as many lenders offering them. This is especially true when compared to regular mortgages. Make an enquiry with an advisor, we’ll then guide you through the process from start to finish.

What is a self-build mortgage?

A self-build mortgage is a loan used to fund the cost of building your home. This is different from a regular mortgage as the property is yet to be built. As a result, lenders release funds for a self-build in stages.

Key features include:

  • Only to be used with building your own home
  • Can include the purchase of the land (must have planning permission)
  • Funds are released in stages
  • 70% loan to value minimum

Why do lenders release funds in stages?

Mortgage funds are released in stages because lenders want to reduce the risk attached to the loan. Lenders are able to lend freely on properties that are already built as they have a property to secure a mortgage against. With a self-build project, there isn’t a tangible asset as of yet. That’s why money is released throughout the build in intervals. This is to ensure the mortgage is used accordingly and as agreed in your application.

How is this different to development finance?

A self-build mortgage is not the same as development finance. Although they are similar, development finance is used for projects of a much larger scale. Development finance is typically used by developers with the aim of generating a profit, either by selling or renting.

Learn more: What is development finance?

Which type of self-build mortgage will I need?

There are two types of self-build mortgages:

  • Mortgage in arrears
  • Mortgage in advance

It’s important to establish whether your lender will release the capital in advance or arrears so that you can plan your build accordingly.

Mortgage in arrears

This is where the funds are released after each stage is complete. A mortgage in arrears can be suitable for those that already have the capital to complete each stage of the build. This is the most common type of self-build mortgage available.

Mortgage in advance

This is where the funds are released prior to each stage, which can be very useful if you’re slightly strapped for cash. That said, there aren’t many lenders that offer mortgages in advance for self-builds.

ask a mortgage broker

What stages do lenders release funds?

The stages at which funds are released depends on your mortgage lender. Nonetheless, most lenders release funds at the following stages:

  1. Purchase of land
  2. Preliminary foundations
  3. Wall plate level
  4. Roofed in (wind and watertight)
  5. Interior walls plastered
  6. Completion

A lender will send a surveyor out at each payment stage. This is to verify each stage is satisfactory so that the next phase of the build can begin.

If you already have the capital for the build itself but require a mortgage to fund the purchase of land alone, then it is possible to get a land mortgage.

Read more about mortgages for land here.

Self-build mortgage rates

Mortgage rates will tend to start at around 4%. Interest rates can go up to 7% as an overall maximum, although it is rare. The loan to value for self-build mortgages typically starts at 70%, although some lenders may offer 75% of the overall build cost.

Rates tend to be higher than traditional mortgages simply because of the risk involved. There’s far less risk involved with mortgages for existing properties. This is because there’s little room for error as the property is already built.

Costs to consider

There are also other costs to consider when building your own home such as:

  • Planning permission fees
  • Building regulation fees
  • Contractor/builders costs
  • Snagging issues
  • Insurances
  • Legal fees
  • Architect fees
  • Broker fees

Will I need to pay stamp duty?

One of the main advantages of using a self-build mortgage is that you will save money on stamp duty fees.

If the land itself is purchased over £125,000 then you will have to pay stamp duty on the land itself. Nonetheless, you won’t be liable to pay any stamp duty on the actual build or the overall property value once completed.

Self-build mortgage specialists

Building your own property certainly isn’t an easy task. With so much to plan and organise, finding the best deal to finance your self-build can slow you down.

Our advisors have access to specialist lenders and can prepare your application to increase your chances of being approved.


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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.