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Self Build Mortgages: A Guide

What is a Self-Build Mortgage?

A self-build mortgage is typically aimed at people who want to build their own home. It differs from a traditional mortgage and is designed to help with the building process by releasing funds at key stages of the project.

The interest rate on this type of mortgage is typically higher than the standard residential mortgage. However, some lenders will drop the interest rate once the property is deemed habitable.

Are there Different Types of Mortgage Available for a Self-Build Mortgage?

There are two types of self-build mortgages to choose from, the arrears type and the advance type. The type you choose will greatly depend on whether you require stage payments before or after you custom build a house.

Arrears Type

Payments are released to you as key stages of your project are completed. This type is typically aimed at those who have a large amount of capital already in reserve ready to be used to fund their build.

Advance Type

The payments are released at the start of each stage of your project meaning money is ready to be used at the point of need. The advance type of mortgage eliminates the need to take out a short term or bridging loan to cover the shortfall.

Some lenders will lend during key stages of the build as well as when the project is completed. Some even will additionally lend on the land purchase or existing property too.

This varies from:

  • 75% to 80% of the overall cost of purchase or valuation (whichever is the lower option)
  • Up to 80% of building works costs
  • Up to 75% of the growth in value of your project at key stages during construction.

Some lenders won’t lend on land but they will lend during the build period, so only when there are construction works occurring on the land. Some of the products that they will offer include discounts from the standard variable rate of interest, fixed rate of interest, tracker rates and offsetting options.

How do I Assess the Cost of my Building Project for my Mortgage Application?
You will need to provide building plans and a breakdown of estimated costs. You can use a build cost calculator to find out what the cost is likely to be for the dream home you have in mind. Don’t forget to have a financial buffer to fall back on in case things do not go to plan, you must prepare for things to go wrong.

You will need to assess the following costs:

  • Land purchase fees and any fees that come with the purchase
  • Project management, including health and safety
  • Design fees
  • Construction costs (Building Regulations drawings)
  • Site preparation and valuation fees.

A budget is an important part of any construction project, so you need to ensure that you are fine tuning it. You could seek advice from a quantity surveyor to give a bit more certainty behind your estimations.

How Much Can I Borrow with a Self-Build Mortgage?

The amount that you can borrow will depend on your financial situation and history. Your income and outgoings will be used to give an amount as to how much you can borrow. For any mortgage. you will also need a good credit score to get the most out of your money.

What Will Impact my Chances of Getting my Self-Build Approved?

The property that you are living in whilst carrying out your project will impact the affordability of the build. Your monthly rental payments or mortgage repayments will have to be taken into account as they will not pause just because you are carrying out a build.

You must also take into account that if you are building a property you intend to move into you may encounter an early repayment charge on your current mortgage if it has not ended before you move.

Some lenders prefer you to make rental payments before carrying out a build as a form of security, this will make you more attractive to your lender for future borrowing too. Every mortgage lender is different and will require different criteria.

Some lenders will require you to stick to the budget that you provide to them, others may even say that you must have a quantity surveyor to provide the build costs. Always look into what a lender requires or speak to a mortgage broker if you aren’t sure on what the lender wants.

What Supporting Documentation Do I Need to Bring with my Application?

You will need the same documents needed for a traditional residential mortgage as well as a few additional pieces too. This may include the following:

  • Copy of planning permission
  • Copy of construction drawings and specs
  • Copy of estimated costs and any fixed-price contracts
  • Copy of the Building Regulations Approval
  • Architect’s Professional indemnity cover (if applicable)
  • Standard Assessment Procedure (SAP) calculations – this usually comes with the Building Regulations package
  • Copy of any insurance for the site and workers and a structural warranty
  • Credit report.

A valuation will be carried out to establish the current value of the land and the estimated end value after your build is completed. The reports will need to be presented to the lender to release the funds you are applying for. You should consider a timescale for how long the build will take and also note that all documentation must be legitimate.

Why Should I Speak to a Mortgage Adviser?

Mortgage brokers can help with all the documentation needed for your mortgage application.

They will also be able to find the most suited mortgage product for your own personal requirements. Mortgage brokers will be able to compare lenders for you and tell you what you will need before you apply.

General enquiries are free and there is no point in not being certain on any aspect of your next financial commitment.

Get in touch with a mortgage broker today to speed up the process and maximise your chances of being able to build that dream home.

Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.

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