What is a self build mortgage?
A self-build mortgage is designed to meet the specific needs of someone who is looking for financing to build a house rather than buying a property that is already built and ready to move into.
Whereas a traditional mortgage will release all of the funds required to complete a purchase in one go, mortgages for self build homes will release money at key stages during the construction of your property.
Are there any self build mortgage requirements I should know about?
Self build mortgage lenders will usually offer this type of lending on the understanding you have the means and expertise to either build a home yourself or be able to supervise its construction.
If you don’t feel you have the expertise, don’t panic. Lenders will also consider your application if you are intending to hire a contractor or building expert to manage the construction work on your behalf.
When are the funds released for a self build mortgage?
The release of stage payments for your self build mortgage will tend to vary from lender to lender.
There can, typically, be up to five identifiable stages during bricks and mortar property construction where self build mortgage funds will usually be released:
- Purchase of a plot of land
- Foundations and footings in place
- Eaves height completion (walls built up to roof level)
- Watertight roof in place
- Internal completion and final fixes
Releasing funds in stages allows you to plan ahead with your construction costs in the knowledge you will know when to expect to receive money. These funds can then be paid to contractors or any other third parties who may be owed money as part of the build.
How do self build mortgages work?
Traditionally there are two types of self build loans, based on when the funds are released at each stage in the build process:
- Arrears – funds released upon completion of each build stage
- In advance – funds released upon commencement of each build stage
Of the two types of self build mortgage, the arrears option is most commonly used with the money for each stage paid out once the work has been completed and a professional valuer has assessed the construction to that point. For this reason most lenders will want you to be able to fund the first 20% approximately yourself.
This type of self build mortgage is better suited to those who already have sufficient capital of their own to help fund the construction of the property without being over reliant on self build loans.
However, not everyone who has the desire to build their own home can fall back on large cash reserves. In this instance the ‘advance’ self build mortgage would be a better option. As the money is released at the beginning of each stage rather than at the end, you would have the self build finance you need to pay for materials and labour costs.
Advantages of a self build mortgage
The main advantages of mortgages for self build properties would be:
- You get to design everything in your dream home, from scratch, to your own specifications
- Generally works out cheaper overall to build your own home rather than to buy the equivalent as a completed property
- Savings on stamp duty – you only pay if the price of the plot of land exceeds the stamp duty threshold (building costs are not included)
Disadvantages of a self build mortgage
The main disadvantages of using a mortgage loan to build a house would be:
- Interest rates and deposits for self build loans are usually higher than traditional mortgages due to the risk involved for lenders
- Usually there’s much more paperwork involved with building your own home and it requires careful planning throughout otherwise costs may escalate
- Cost of alternative accommodation whilst your new home is being built
- The possibility of unforeseen costs and time delays is greater
If you’re thinking of getting a mortgage to build a house and want to know more about the types of self build finance mortgages available, make an enquiry and we will arrange for an expert to get in touch.
Can I get a mortgage for a self build project?
If you meet the lender’s eligibility and affordability requirements – which usually include having the means and expertise to build a property from scratch – then absolutely!
Mortgages for self builds are usually offered by specialist lenders and the whole-of-market brokers we work with know exactly which providers to approach for these products.
How much money can I borrow for a self build mortgage?
The amount you can borrow in the UK for a self-build mortgage will vary from lender to lender and will be based on their own internal affordability criteria. In this respect, a mortgage for self build purposes follows a very similar path to that of a traditional UK mortgage.
A multiple of your income will be used to form the basis of what a lender may initially be prepared to lend you for a self build mortgage. Most lenders will use a multiple of 4x your income, some will use 5x your income and a few will go as high as 6x your income in certain circumstances.
Once a full affordability assessment has been completed, which includes an analysis of all your current income and expenditure, a lender will then make a final decision as to what you will be allowed to borrow.
For self build mortgages, most lenders can offer maximum borrowing up to £500,000, some will go up to £600,000 and a few will go as high as £1 million depending on the strength of the application and the location of the project.
What deposit is usually required for self build mortgage?
Due to the unique nature of self build finance it’s not unusual for a lender to request a large deposit in order to provide them with sufficient security and confidence to allow borrowing for a building project rather than a property already completed.
What is the minimum deposit needed for a self build mortgage?
Most lenders will offer a loan to value (LTV) of 60%, some will go up to 70% and a few will go as high as 80%. In certain circumstances there are particular lenders who may offer a self build mortgage with a LTV as high as 95%.
100% self-build mortgages: Can I get a self build mortgage with no deposit?
100% mortgages are quite rare, even for traditional mortgages. However, the advisors we work with adopt a ‘whole of market’ approach and would be able to help you source self build mortgage providers that offer the best deposit terms, including 100% self build mortgages. You will more than likely need other security that the lender can use as the deposit.
If you’re looking at financing a self build and want to know more about how much you can borrow get in touch we can arrange for a specialist to contact you and discuss further.
Can I get a self build mortgage using land as the deposit?
If you are applying for a self build mortgage and already own the land you’re planning to develop on, some lenders will allow you to put a percentage of the plot’s value towards the deposit. Exactly what percentage you can use will vary from lender to lender, so specialist advice will be needed to find the best deal for you.
What other self build finance options are available?
If you run a commercial building business there are a number of other viable alternatives available which you could use to help build a house other than a mortgage.
How to get financing to build a house, besides using a self build mortgage
You could potentially secure funding for a development project by applying for one of the following products…
If you’re building a house in a private capacity for yourself, there are a few alternatives you could consider:
- Remortgage to build a house
- Taking out a second mortgage to buy a house (2nd charge borrowing)
- Unsecured personal loan (if amounts required are below £25,000)
Both the above options have their merits depending on your circumstances.
Frequently Asked Questions
In this section, you will find the answers to some of the questions we hear most frequently about self-build mortgages.
How easy is it to get a self build mortgage?
It can be more difficult to get a self build than a standard residential mortgage as fewer lenders offer these products and the ones which do usually have additional eligibility requirements, such as the borrower having development experience.
Whether you have development experience or not, the best way to apply for a self build mortgage is through a whole-of-market broker, like the ones we work with.
Can I use a self build mortgage for a barn conversion?
Yes, it’s certainly possible. Barn conversions typically require significant re-construction work to be carried out – plus planning permission in place – and whilst they would not be classed as a new property built from scratch, a self build mortgage would be a consideration as would a conversion and renovation mortgage.
If you’d like to know more about the different finance options available for barn conversions take a look at our specific article on this subject here.
Can I get a self build mortgage without planning permission?
It’s highly unlikely any lender will lend you money for such a project without the requisite planning permission because without this you can’t proceed to build.
In the UK, planning permission usually comes in two stages –
- Outline consent – agreement with local authority to build on the plot of land but no agreement for the specifics of the property
- Detailed consent – agreement on the specifics of the property
Some lenders may lend you some of the money once outline consent has been received. However, further stage payments could be withheld until full detailed consent is in place.
With a self build mortgage, when do payments start?
As outlined above, you can usually start drawing down payments from a self build mortgage once a sale has been agreed for the plot of land where you are planning to build your new home.
Further stage payments will commence once identifiable progress has been made on the new property and would be pre-agreed in advance with your lender.
Can you use a mortgage for a self build for buy to let mortgages?
Yes, it’s possible. There are no caveats placed upon self build mortgages in relation to whether the intention, once the property has been built, is to live in it permanently or to make it available to rent out.
It’s important to discuss your intentions with any prospective lender so they can give you the most appropriate advice and find a lending method most suitable for your requirements.
Can I get a mortgage to build a house with a bad credit record?
A poor credit history can, no doubt, cause problems with how much a lender may be prepared to lend you for a self build mortgage, depending on the type of bad credit you’ve had and when it was registered.
Some lenders might offer unfavourable rates or turn the borrower away if there’s bad credit on file, but there are specialist commercial lenders who cater for individuals and businesses with various forms of bad credit.
Find out more about getting a mortgage with bad credit. Alternatively, make an enquiry and we can arrange for an expert to contact you directly and discuss further.
Can I use the Help To Buy scheme in conjunction with a self build mortgage?
This is a slightly tricky one. As long as you meet all the other help to buy criteria you can use the government bonus towards the purchase of land for a self-build home. Your intention would have to be to live in the property and it must be priced no more than £250,000 (outside London) or £450,000 (in London).
However, you would need to find a lender who would also agree to release the mortgage funds in stages, in line with the benefits of a self-build mortgage.
If you make an enquiry we can arrange for an expert to contact you and discuss further.
Can I get a self build mortgage for a second home?
Yes this is certainly possible. The lender you choose will have their own affordability criteria for what they will allow you to borrow for a second home. If you match this criteria (which is usually stricter than for a first home) there’s no reason why you cannot proceed.
Can I get a self build mortgage using a limited company?
Yes, there are no restrictions on applying for a self build mortgage in the UK either in your personal name or in the name of a business.
If you make an enquiry we can arrange for an expert to get in touch and offer advice as to the benefits and potential pitfalls of using a limited company rather than your personal name to apply for a mortgage.
Can you get mortgage interest relief for a self build mortgage?
Mortgage interest relief is available to buy-to-let landlords and is a tax allowance designed to reduce the overall tax burden on their rental income, therefore, wouldn’t really be connected to the main purpose of a self build mortgage.
At the time of writing, this is being phased out by HM Treasury and within a couple of years mortgage interest relief will no longer be available.
Is it possible to get a self build mortgage with no income?
All self build mortgage lenders, as with traditional mortgages, will conduct a full affordability assessment before agreeing to proceed with any application. In this respect it is likely that your application will be declined if you are unable to provide any income details.
Are interest only self-build mortgages available?
Yes, these products are available as interest only, capital and repayment, and part and part mortgages, subject to availability.
Can I get a commercial self-build mortgage?
Self-build mortgages are geared towards the residential sector. If you are hoping to build your own commercial property, the product you would need to apply for is development finance – you can read more about that in our guide here.
Are there self employed self-build mortgages?
Yes, self build mortgages for self-employed and contractors are available. Your choice of lenders will be slimmer and the way the deal is assessed will be different – you can read more about how lenders treat self-employed applicants in our guide.
Can I get a self build mortgage to construct a timber frame property?
Yes, timber frame is a popular material among self build lenders as it can mean faster construction and a development cycle that’s less weather dependent.
That said, some mortgage providers won’t lend on timber frame properties, so it’s essential to seek specialist advice to ensure you end up with favourable rates.
Can I get a self build mortgage to construct a log cabin?
Log cabins fall into the ‘timber frame’ niche as well as the non-standard construction category, which means you choice of approachable lenders will be fewer if you plan is to construct one from scratch via a self-build mortgage.
With this in mind, it’s important to consult with a whole-of-market broker for the right advice and to ensure you end up with the most favourable rates.
I can’t get a self build mortgage. What can I do? Speak to an expert!
If you’ve been declined for one of these products, help is available!
Self build mortgages are set to become increasingly popular throughout 2019. They can be quite complex and its important you understand all the potential pitfalls before taking the leap. Lots of people in your situation seek professional advice to assist them before making a final decision.
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.
Then sit back and let us do all the hard work in finding the mortgage advisor with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.