Last reviewed on 18th September 2023 by Martin Alexander (Mortgage Advisor)
Building a home from start to finish is a dream for many, but what is the best way to fund a project like this? You’ll likely 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. Nonetheless, a self-build mortgage can help fund your home’s development.
A mortgage for a self-build home is a niche type of finance, so there aren’t as many lenders available. 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.
Funds are released in stages because lenders want to reduce the risk attached to the loan. Lenders can lend freely on properties already built as they have a property to secure a mortgage against. With a self-build project, there isn’t a tangible asset yet. That’s why money is released throughout the build in intervals. This ensures the mortgage is used accordingly and as agreed in your application.
Important: 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. Developers typically use development finance to generate a profit, either by selling or renting.
Learn more: What is development finance?
How does a self-build mortgage work?
When carrying out a self-build, the mortgage works in a different way from a regular mortgage:
- Only for building your own home – The mortgage itself can only be used to build your own home and can’t be used for investment purposes.
- The mortgage can cover the cost of the land – Rather than funding the build only, the mortgage can also be put towards purchasing the land. That being said, the land must already have planning permission to build a home.
- Funds are released in stages – Rather than receiving the funds as a lump sum, the funds are released in stages. This is so lenders can ensure the build is progressing as planned.
- Save for a large deposit – The majority of lenders will only offer 70% loan-to-value mortgages. This means that you’ll need at least a 30% deposit.
Which types of self-build mortgages are there?
There are two types of self-build mortgages:
- Mortgage in arrears – This is where the funds are released after each stage is complete. A mortgage in arrears can be suitable for those with the capital to complete each build stage. 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.
It’s essential to establish whether your lender will release the capital in advance or arrears so that you can plan your build accordingly.
At what stages do lenders release funds?
The stages at which funds are released depend on your mortgage lender. Nonetheless, most lenders release funds at the following stages:
- Purchase of land
- Preliminary foundations
- Wall plate level
- Roofed in (wind and watertight)
- Interior walls plastered
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.
What mortgage rates can I expect?
Interest rates on a self-build will tend to start at around 6% but can go up to 8% 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/builder’s costs
- Snagging issues
- 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 for 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. Each case is unique, so it’s recommended to speak to a specialist who has experience in this field. Furthermore, understanding the various options you have can be overwhelming.
Our advisors have access to specialist lenders and can prepare your application to increase your chances of being approved.
About the author
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.