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Self build mortgages

Have you ever thought about building your own home?  How would you build it, who would build it and how would you finance it? 

You can build your dream home yourself or employ professionals to do it for you, or a mix of the two. 

To finance the project you will need a self build mortgage, which is designed for people who want to build their own home to live in as their main residence.

A self build mortgage is different to a standard residential mortgage and in this guide, we explain how a self build mortgage works.

There are 3 ways you can build your own home:

  • Self build

  • Custom build

  • Renovation or conversion

What is self build?

Self build is where you buy a plot of land and get planning permission to build on it. You design and build your home employing a range of workers to assist you – depending on how hands-on or -off you want to be.

What is custom build?

Another option is ‘custom build’.  This is similar to self build but could be considered an easier option. 

The land has already been bought by a property developer who is responsible for making sure all the infrastructure is in place. So the developer will build the roads, put in street lighting and utilities – gas, electricity, water mains, sewerage and broadband. 

Plots can be singular, a small group of houses, or a larger community. You buy a plot, choose the design of your home and it is built by the developer for you. Some custom builds offer you freedom to have a big say in your home’s design features, while others may offer less choice.

What is renovation or conversion?

If you want to renovate or convert an old building you will need a self build mortgage. This could be a barn conversion, warehouse conversion, or changing a shop/office into a home.

How does a self build mortgage work? 

Instead of borrowing a lump sum, as with a normal house buying mortgage, the self build mortgage issues the loan in instalments at various stages of the build. This can be in at the start or the end of each stage.

Depending on the lender and type of loan, a valuer may be required to value the property at each stage to make sure the valuation is on track before the lender releases the next stage of funds.

Arrears stage mortgageYou receive each payment after the stage has been completed. So you will need to have your own money to start the build. Many self build lenders offer this option.

Advance stage mortgageThe money is released before each stage is started. The advantage here is that you need less of your own savings to begin with and it helps with cash flow. Less self build lenders offer this option as it is deemed to be more risky for them, but numbers are increasing.

What are the stages of a self build?

Most lenders have 5 or 6 stages where they release funds to the borrower:

  • Buying the land

  • Laying foundations

  • Construction of walls

  • Wind and watertight (windows, doors and roof fitted)

  • First fix (plastering, laying cables for gas and electricity and pipework for water and heating)

  • Second fix to completion (connection of the appliances)

Not all lenders rely on set construction stages and may release funds as the build progresses up to a percentage of the increased value of the property.

How much can I borrow?

Most self build lenders will lend on 75% of the land’s value, as well as 75% of the end value of the property when completed. There are a few lenders who will lend up to 85% or even 95% of the land and property value.

Self build mortgage fees

Fees vary among lenders but there is usually an application fee and/or a completion fee. These can be set fees or a percentage of the loan amount such as 0.5%.

There will also be valuation fees and legal fees.

Self build mortgage interest rates

Interest rates for self build also vary between lenders and are higher than standard residential mortgage rates. In general interest rates range from 4% to 6%. 

Once the home is finished some lenders will allow you to move to a residential mortgage which should have a lower interest rate. 

Some lenders also have incentive interest rates if you make your home energy efficient. 

You may be able to take out an interest-only mortgage, as opposed to a ‘capital and repayment’. This means you only pay interest on the amount you borrow. The advantage is that your monthly repayments are lower but the disadvantage is that you will still have the original mortgage amount to repay at the end of the mortgage term.

For example, if you take out a £300,000 mortgage for 25 years, when that mortgage comes to an end you will still owe £300,000 to the lender. So you must have a repayment vehicle in place to run alongside your mortgage such as investments, endowment or an ISA. This is to ensure you will be able to pay back the full amount.

How can I get a self build mortgage?

There are around 30 lenders who specialise in self build mortgages, they are mainly building societies. They have specialist underwriters who can work with you through all the stages of your build.

These lenders all have different criteria so you could get advice from a mortgage broker or better still a specialist self build mortgage broker.

What costs are involved in a self build project?

Planning permission

It is essential to have planning permission to build a property and you apply for this via your local authority. This can take a few weeks but some lenders will accept outline planning permission to start the application process. You will need to have detailed planning permission before the mortgage is granted.

Buying the land

Your local authority will have a list of plots that are available to buy in order to build homes on under the ‘Right to Build’ scheme. There are various websites where you can find land for sale.

Architect

An architect can draw up plans and help you design your dream home.

Project manager/building firm

You can project manage yourself but this will be difficult if you work full time. An experienced project manager will oversee all the work, the labour and materials. Or you could employ a building firm to do all the work for you.

Building costs

Your lender will want to know the detailed costs involved in the build. You could have a fixed price contract with a builder but a breakdown of costs will be necessary.

Survey

The plot you choose should be checked out to make sure there are no problems with it. This could include contaminated land, it is in a flood zone or there are tree preservation orders. You need to know how you can access water, electricity, gas and broadband. You will need this sort of information for your planning application.

Building regulation completion certificate

Once the build is complete you need to get a building regulation completion certificate from the building regulation department of your local authority. An inspector will inspect the site before work starts, during the build and when it is completed.

Self build warranty

Most lenders insist you have a self build warranty, which is an insurance policy against structural problems that might arise after the property has been built. Some lenders only require a building regulation completion certificate.

A warranty lasts for 10 years so if there are any major faults with the build the warranty provider will put them right. This covers situations like cracked walls and roof problems but does not cover smaller issues like wear and tear or weather damage. 

The warranty provider’s surveyors will inspect the site at key stages including before the build work starts to ensure it meets technical standards. In order to keep the warranty valid the property must be regularly inspected by the warranty provider.

Generally, you cannot sell the property for the first 2 years and although a warranty is not compulsory by law, you are unlikely to get a self build mortgage without one. And it will be difficult to sell the property within the first 10 years if you do not have a warranty.

You should also check with your lender which warranty providers they will accept before taking out a policy. And check what is and is not covered.

Architect’s certificate

An alternative to a warranty is an architect’s certificate, which lasts for 6 years. This is issued by an architect or surveyor and states that the property has been built to the planned specifications and complies with building regulations. Check with your lender if an architect’s certificate is acceptable.

Site insurance

You should protect your site against all sorts of potential problems from theft and damage of materials to injury of people and to cover legal expenses. 

Accommodation

Where will you live when your new home is being built? Your rent or mortgage will be taken into account by the lender for affordability purposes.

Contingency fund

It is not uncommon for self builders to go over budget with unexpected issues and costs cropping up. So it is recommended you factor in extra costs of 20% to 30% over your anticipated spend.

Can a first time buyer get a self build mortgage?

First time buyers can apply for a self build mortgage but they may have to pay a higher deposit, perhaps even up to 40% of the build costs. It depends on the lender.

What documentation will a self build lender need?

  • The usual mortgage documentation of proof of identity and address, payslips, bank statements, rent/mortgage payments and proof of deposit.

  • Copy of planning permission (from your local authority)

  • Building regulations approval (either from a local authority building control service or a private sector approved inspector building control service)

  • Architects drawings

  • Who will be doing the work?

  • What work will be undertaken?

  • Projected material and labour costs

What other information will the lender need to know?

  • As with a residential mortgage, lenders will need to know your employment details, income, outgoings, past and present debt and they will conduct a credit check.

  • Where will your property be built?

  • What type of property are you building? Will your new home be made from traditional or non-standard material or modern methods of construction? This is important as some lenders will only consider traditional methods while others are happy to lend on more unconventional building types.

  • How long will it take to build the property? Some lenders have a time frame on how long the build should last – 2 years is fairly common.


9th October 2020