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A Guide to Self-Build Mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 25, 2021

If you’re looking for a mortgage to build a house did you know you can use a specific type of lending called a self-build mortgage?

Self-build mortgages can be ideal for anyone with the means to build their own property or oversee its development, but it’s a good idea to do some research and seek professional advice before you start. In this guide, you’ll learn how self-build mortgages work, how to get one and where to find a mortgage broker who arranges them every day.

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-built homes will release money at key stages during the construction of your property.

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.

How 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.

When are the funds released?

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:

  1. Purchase of a plot of land
  2. Foundations and footings in place
  3. Eaves height completion (walls built up to roof level)
  4. Watertight roof in place
  5. 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.

Advantages and disadvantages

All types of borrowing have benefits and potential drawbacks to consider and it’s important to weigh them up before you apply. With self-build mortgages, the advantages and disadvantages are as follows…

Advantages

The main advantages of mortgages for self build properties would be:

  • You get to design everything in your 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)
  • Most people who successfully self-build find that the value of the property is generally greater than the cost of the development work

Potential disadvantages

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

One thing to keep in mind about these disadvantages is that the right mortgage broker could help you avoid or minimise them. For example, an advisor who specialises in self-builds can help you with your paperwork and make sure you get the most favourable rates.

How much could I 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.

The exact amount you can borrow on 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 residential 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.

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Deposit requirements

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.

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%.

Getting 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.

Using land as a 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.

Other self-build finance options to consider

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.

You could potentially secure funding for a development project by applying for one of the following products…

You can read more about each option through the links above.

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)

All of the above options have their merits depending on your circumstances, so speaking to a self-build mortgage specialist who can talk you through each one is recommended.

Get matched with a self-build mortgages expert today

Self-build mortgages are becoming increasingly popular but they can be quite complex. It’s important you understand all the potential advantages, pitfalls and potential alternatives before taking the leap, so seeking professional advice is recommended.

This is where we come in! We’ve made it our mission to ensure that everyone gets the right advice about mortgages, and we offer a free broker-matching service to make this possible. Our free service will carry out a quick assessment of your needs and circumstances to pair you up with the advisor who’s best placed to help you get a mortgage.

In this case, you will be matched with a broker who specialises in self-build mortgages and has a strong track record helping customers just like you. Call 0808 189 2301 or make an enquiry here to get started – your first consultation will be free with no obligation to proceed and it won’t leave any marks on your credit report.

FAQs

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.

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 self-build mortgage 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 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 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 to development finance.

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 to self-employed mortgages.

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 limited company.

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 your 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.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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