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.
Below are the typical stages of a self-build, whether it may be built of brick/block or a timber frame property:
|Stages||Brick or Block||Timber Framed|
|Stage 1||Purchase of Land||Purchase of Land|
|Stage 2||Pre lim costs & Foundations||Pre lim costs & Foundations|
|Stage 3||Wall Plate Level||Timber Frame Kit Erected|
|Stage 4||Wind & Watertight||Wind & Watertight|
|Stage 5||1st Fix & Plastering||1st Fix & Plastering|
|Stage 6||2nd Fix to Completion||2nd Fix to Completion|
Mortgage to Buy Land
As above, once you have found a plot of land, assuming it has the correct permissions, it is possible to obtain a mortgage to purchase it, typically a lender will offer anything from 50% of the value of the land up to a maximum of approximately 75%. Depending on your personal circumstances, it may be more cost effective to obtain as much mortgage on the land and to use your own monies towards the build as this may reduce the amount of stages required and therefore the cost of releasing monies of each stage. Please speak to your self-build specialist and they will discuss this in more detail for you.
Advantages 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.
Disadvantages of Self Build Mortgages
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 floor plans, 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.
Self-Build Mortgage Rates
Self-Build Mortgage rates are significantly higher than your traditional residential mortgages, we tend to recommend a scheme that does not have any penalties attached to it, which will enable you (subject to underwriting) to remortgage the property to another lender at a much improved rate. It is always best to keep in contact with your mortgage adviser to ensure that a remortgage application is applied for at the earliest opportunity to avoid paying more for any longer than you have to.
Self-Build Mortgage Lenders
Due to the complex nature of self-build, there are a limited amount of mortgage lenders that choose to be part of this market. Just Mortgage Brokers have access to the leading lenders and can find a suitable self-build mortgage based upon your personal circumstances.
Self-Build Mortgage Advice
At Just Mortgage Brokers, we have years of experience in helping people find and secure self-build mortgages and due to the complexity of this type of mortgage, it is vitally important to receive the right advice. 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.