Mortgages  > Types  >  Self Build Mortgages

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Self-build mortgages

If you're planning to build your own home, you won't be eligible for a regular residential mortgage.

Instead, you can apply for a specialist, self-build home loan, which differs from a normal mortgage in several key ways.

How do self-build mortgages work?

With a standard mortgage, funds are provided as a single lump sum. However, with a self-build mortgage, the money is released in stages.

From the lender's point of view, this keeps the loan risk to a minimum.

It makes it easier for the lender to pinpoint the way the money is being spent throughout the building process. It also makes it less likely that you'll overspend in one area and run out of money before the property is built!

The exact point at which each portion of money is released - and the amount you can borrow - will depend on the particular lender.

But they will all expect you to have raised a deposit for part of the cost of the land and may also expect you to have some savings left over for the building costs too.

Some lenders will insist on sending valuers to carry out re-inspections on site as the building project progresses before they'll release more cash.

Generally speaking, the first sum of money released will be the amount you need to buy the plot of land (minus the deposit you're required to already have as part of the self-build mortgage deal).

For example, if a plot of land costs £100,000, the initial lump sum you'll be advanced could be £80,000 in the case of an 80% advance but it could be as low as 60%. So you'd be expected to already have a £20,000 to £40,000 deposit.

After this, the amount of money needed for the build itself will be released, typically in chunks of 15% to 20% as the construction work progresses.

Check whether you'll be given the first-stage payment before you start building or only after you've completed the initial phase.

How do I apply?

You'll need to have quite a lot of information ready to show the lender (usually more than you need for a regular mortgage).

For example, make sure you're able to produce:

  • The cost of the plot;
  • Detailed plans of the home you want to build;
  • Detailed cost projections including contingencies; and
  • Evidence of your planning permission.

The process can therefore be more time-consuming, and potentially more confusing.

Advantages

Research suggests that self-build homes are usually worth considerably more on completion than they cost to construct.

Building your own home could help you save a small fortune in Stamp Duty Land Tax (SDLT). You only have to pay duty on land if a plot is worth more than £125,000.

Disadvantages

Because many lenders don't offer self-build mortgages, there is less competition than in the regular mortgage market.

Therefore, the choice of self-build mortgages is limited - and the rates offered are typically less competitive.

Some lenders will also insist that you get your property professionally designed and built for you (rather than actually building it yourself).

Finally, it's important to take into account all the extra costs - like the hire of an architect - that self-building entails.

It's a good idea to build up an emergency fund before you start, to cover any unexpected costs that may occur.

 
 
Lender Initial Rate Duration Standard Rate Overall Cost For Comparison Max Loan To Value Fee
2.59% 2 years 5.69% 5.4% APR 75% £999
2.69% 2 years 4.99% 4.9% APR 75% £495
2.94% 2 Years 5.69% 5.4% APR 75% £199
2.99% 2 years 4.99% 4.9% APR 85% £495
2.99% 3 years 4.99% 4.6% APR 70% £499
3.0% 2 years 5.69% 5.5% APR 80% £999
3.19% 5 Years 4.79% 4.2% APR 80% £995
3.35% To Jul 2014 4.95% 4.6% APR 75% £999
3.5% 2 years 5.49% 5.1% APR 75% £595
3.84% 2 years 3.94% 4% APR 90% £499

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