When looking to own a property, most people are happy to search for either a newly built or existing property that most closely matches their idea of an ideal home. Others, however, dream of building a new home to their own specifications, where they can have input and final say on everything from the size of rooms to the tiniest cosmetic details. Whether you have the skills and expertise to design and/or build a home yourself, or intend to hire contractors to do the work, you will need a special type of self-build mortgage to fund the plot purchase and construction.
What is a self-build mortgage?
Self-build mortgages are the same as residential mortgages, in the sense that you take out a loan to acquire a property. However, whereas residential mortgages release the mortgage funds as a single lump sum to purchase a property, with a self-build mortgage the lender releases the money in stages (or “tranches”) throughout the build process.
Exactly when funds are released varies from lender to lender, but common stages include an initial release to purchase the land, and further releases when the property is, for example, completed to first-floor level, completed to eaves, and when the roof is made watertight. The final tranche is released upon completion of the build. It’s common for the mortgage to operate on an interest-only basis until the final release of funds, upon which it switches to a repayment mortgage.
While all self-build mortgages release funds in stages, some lenders will release payments in advance of each build stage while, more commonly, others will pay out only after each build stage has been completed and signed off by a surveyor. The type of self-build mortgage you take out will depend on whether you have cash upfront to buy materials or pay contractors, or will be relying on mortgage funds to meet payments.
Advantages and disadvantages of self-build mortgages
In addition to the advantage of being able to oversee the design and building of your dream home – perhaps even at a lower cost than it would be to purchase an equivalent property – there can also be advantages with regard to stamp duty. No stamp duty is owed on the cost of the building work, and you will only have to pay stamp duty if the cost of the plot of land itself is more than £125,000.
It is worth bearing in mind that self-build mortgages can be quite expensive compared to standard residential mortgages, with higher interest rates and associated fees. You’ll also often have to put down a bigger deposit – commonly a minimum of 25% of the total cost, but in some cases lenders may ask for as much as 50%.
Self-build mortgage lenders will require detailed documentation relating to the build project, including full floorplans, a projection of the project costs, and appropriate planning permission. As a final note, remember that you will also have to cover your costs for accommodation during the build, whether that’s mortgage or rental costs on your current home, or paying for temporary accommodation.
How Just Mortgage Brokers can help
Not all lenders offer self-build mortgages, and those that do can have quite involved and lengthy application procedures. At Just Mortgage Brokers, we have years of experience in helping people find and secure self-build mortgages. We also have access to self-build mortgage deals from across the UK market, including smaller, more specialised lenders. Call us today to discuss how we can help.