A self-build mortgage can help you finance a home that you plan to build yourself.
It works differently from a normal residential mortgage.
With a standard mortgage, the lender usually provides the money to buy a completed property. With a self-build mortgage, the money is normally released in stages as the project moves forward.
This can help pay for the land and building work.
However, building your own home needs careful planning. You will also need to allow for delays and unexpected costs.
What Is a Self-Build Mortgage?
A self-build mortgage is designed for people creating their own home.
This does not mean you have to physically build the house yourself.
For example, you could:
- manage the project yourself
- employ individual trades
- use a main contractor
- buy a building kit
- use a specialist self-build company
The important point is that you are funding the construction of a new home rather than simply buying a finished one.
How Is It Different From a Normal Mortgage?
With a normal mortgage, most of the money is released when you buy the property.
A self-build mortgage is different.
Instead, the lender normally releases money at agreed stages.
For example, payments could be linked to:
Buying the land
Completing the foundations
Building the walls
Making the property wind and watertight
Completing the interior
Finishing the property
The exact stages vary between lenders and projects.
Therefore, check how and when your lender will release funds.
Why Are Payments Released in Stages?
At the start of a self-build project, the completed home does not yet exist.
Therefore, the lender cannot treat it in the same way as a finished property.
Instead, the lender releases funds as the value of the project develops.
This helps limit the lender’s risk.
However, it also means you need to plan your cash flow carefully.
What Are Arrears Stage Payments?
Some self-build mortgages release money after a stage of work has been completed.
These are often called arrears stage payments.
For example, you may need to pay for the foundations first. The lender then releases the agreed funds after that stage has been checked.
This means you may need enough money to cover building costs before receiving the next mortgage payment.
Therefore, cash flow is very important.
What Are Advance Stage Payments?
Some self-build mortgages can provide money before certain work is completed.
These are often known as advance stage payments.
This can reduce the amount of your own money needed between stages.
However, advance-payment mortgages are not offered by every lender.
Their terms and costs can also differ.
Therefore, check the payment system when comparing self-build mortgages.
How Much Deposit Do You Need?
Self-build mortgage deposits can be larger than deposits for standard residential mortgages.
The amount depends on the lender, land value and project.
For example, you may need your own money for part of the:
- land purchase
- building costs
- professional fees
- early construction work
Lenders may also limit how much they will lend compared with the value of the land or completed home.
Therefore, the amount you can borrow is not based only on the final property value.
Buying the Land
Before you can build a home, you need somewhere to build it.
You may already own suitable land. Alternatively, you may need to buy a plot.
The lender will want information about the land.
For example, it may consider:
- the purchase price
- planning permission
- access
- services
- location
- expected finished value
The lender also needs to know whether the project is suitable for mortgage lending.
Planning Permission
Planning permission can be a major part of a self-build project.
A plot of land does not automatically have permission for a house.
Therefore, check its planning status carefully.
Buying land without suitable planning permission can carry significant risk.
The lender may also require planning permission before agreeing to release funds.
Work Out the Full Building Cost
The cost of the land is only one part of a self-build budget.
You may also need to pay for:
- architects
- engineers
- surveys
- planning costs
- building warrants or building control
- groundworks
- materials
- builders and trades
- utilities
- kitchens and bathrooms
- heating
- flooring
- decorating
- landscaping
- legal costs
- insurance
Therefore, create a detailed budget before starting.
Keep a Contingency Fund
Building projects do not always go exactly to plan.
For example, ground conditions may be worse than expected. Material costs may also rise.
Likewise, work can take longer than planned.
Therefore, it is sensible to include a contingency fund in your budget.
This is money kept aside for unexpected costs.
Without a contingency, even a fairly small problem could cause difficulty later in the build.
How Will the Lender Value the Project?
The lender may consider both the current and future value of the property.
For example, it may look at:
Value of the land
Value during construction
Expected value when finished
Valuations may also take place at different stages.
These can help the lender decide whether the project has reached the point needed for the next payment.
Your Build Cost and Property Value Are Different
Suppose the land and construction cost a total of:
£300,000
However, the finished property may be valued at:
£350,000
Alternatively, it could be valued at less than expected.
Therefore, do not assume that every pound spent on construction will add a pound to the property’s value.
The lender will normally use its own valuation.
How Does the Lender Check Affordability?
A self-build mortgage is still a mortgage.
Therefore, the lender needs to decide whether you can afford the borrowing.
It may consider your:
- income
- regular spending
- existing mortgage
- loans and credit
- dependants
- employment
- credit history
The lender will also consider the self-build project itself.
Therefore, you need both a suitable project and suitable finances.
What Information Might You Need?
A self-build mortgage application can need more information than a standard mortgage.
For example, the lender may ask for:
- planning permission
- building plans
- project costs
- construction schedule
- land details
- professional reports
- details of contractors
- expected finished value
- proof of income
- evidence of your own funds
The exact requirements vary.
Therefore, preparing your documents early can make the process easier.
What If You Already Own the Land?
Owning the land can put you in a different position.
For example, the land may already have a value that can form part of the overall project.
You may also own it without a mortgage.
However, this does not automatically mean the lender will fund all the building costs.
The lender will still assess the project, value and affordability.
What If You Already Have a Mortgage?
You may already own a home while building the new one.
If so, you may have to cover your existing mortgage while also funding the self-build.
The lender will consider these commitments.
Therefore, think carefully about where you will live during construction.
You should also include any temporary housing costs in your budget.
Where Will You Live During the Build?
Building a house can take many months.
Therefore, you need somewhere to live during the project.
You may:
- remain in your current home
- rent somewhere
- stay with family
- use suitable temporary accommodation
Each option has a cost.
Therefore, include temporary living costs when working out your overall budget.
What Happens If the Build Is Delayed?
Construction projects can be delayed.
For example, delays may be caused by:
- bad weather
- material shortages
- contractor problems
- planning issues
- unexpected ground conditions
- changes to the design
A delay can increase costs.
It may also affect your mortgage arrangements.
Therefore, allow some flexibility in both your budget and timetable.
What Happens If Costs Rise?
Suppose your planned build cost is:
£250,000
However, unexpected work increases the final cost to:
£275,000
You now need to find another:
£25,000
Do not assume the lender will automatically provide the extra money.
Therefore, try to understand how you would deal with higher costs before starting the project.
Do You Need Self-Build Insurance?
A normal home insurance policy may not be suitable for a property under construction.
You may need specialist self-build insurance.
Cover can vary. For example, it may protect the building work, materials and other parts of the project.
You may also need other forms of cover depending on how the build is managed.
Therefore, arrange suitable insurance before work begins.
What About Warranties?
Your lender may require a suitable structural warranty or other approved protection for the completed home.
This can also be important if you later sell the property.
Requirements differ between lenders.
Therefore, check what warranty or certification will be needed before construction begins.
Leaving this until the house is nearly finished could cause problems.
What Happens When the House Is Finished?
Once construction is complete, the lender may arrange a final valuation.
You may also need the required completion documents.
After this, some self-build mortgages allow you to move onto a more standard residential mortgage arrangement.
Alternatively, you may choose to remortgage later.
However, check the terms of your mortgage before making plans.
Self-Build Mortgages and Energy Efficiency
Building your own home gives you more control over its energy use.
For example, you may be able to consider:
- insulation
- airtightness
- heating systems
- solar panels
- battery storage
- glazing
- ventilation
- smart controls
Some lenders also offer mortgages linked to energy-efficient homes.
However, always check the actual rates, fees and conditions.
An environmentally focused mortgage is not automatically the cheapest mortgage.
Building Regulations and Standards
Your new home will need to meet the building rules that apply where you are building.
These cover areas such as safety, structure and energy performance.
However, the systems differ across the UK.
For example, Scotland has its own building standards system.
Therefore, use the rules that apply to the location of your project.
Self-Building in Scotland
In Scotland, planning and building standards are separate parts of the process.
Depending on the project, you may need planning permission from the local authority.
You will also normally need a building warrant before relevant building work begins.
Once the work is complete, the required completion process must also be followed.
Therefore, include both planning and building standards in your timetable.
What About Property Taxes?
Tax can also affect the cost of a self-build.
The rules depend on how the land is bought, what is being purchased and where the property is located.
They can also differ between Scotland, England, Wales and Northern Ireland.
Therefore, check the tax position for your particular purchase before committing to the land.
VAT and Self-Build Homes
Some costs linked to building a new home can receive special VAT treatment.
For example, certain qualifying building work may be zero-rated. There is also a scheme that may allow eligible self-builders to reclaim VAT on certain goods.
However, the rules are detailed.
Not every cost qualifies.
Therefore, keep clear records and invoices. Also, check the current HMRC rules before relying on a VAT refund within your budget.
Is Self-Build Always Cheaper?
No.
Building your own home can sometimes offer good value.
However, it can also cost more than expected.
The final cost depends on factors such as:
- land price
- design
- size
- materials
- labour
- location
- ground conditions
- professional fees
- delays
Therefore, do not assume self-build will automatically save money.
A Simple Self-Build Example
Suppose your project has the following budget:
Land: £100,000
Construction: £220,000
Professional and other costs: £30,000
The planned total is:
£350,000
However, you should also consider a contingency.
For example, a contingency of £30,000 would increase the money needed to:
£380,000
The lender may not provide all of this.
Therefore, you need to know how much money you must provide yourself.
Before Applying for a Self-Build Mortgage
Start by gathering the main information:
1. Cost of the land
2. Planning position
3. Estimated building cost
4. Professional fees
5. Amount you can provide yourself
6. Mortgage required
7. Stage payment schedule
8. Contingency fund
9. Temporary living costs
10. Expected finished value
This gives you a clearer picture of whether the project is realistic.
The Key Point
A self-build mortgage can help turn a building project into a finished home.
However, it needs more planning than a normal property purchase.
The lender will consider both your finances and the building project.
Meanwhile, you need to manage the land, construction costs and cash flow.
Therefore, understand when mortgage funds will be released. Also, keep money available for unexpected costs.
Most importantly, create a realistic budget before building begins.
A successful self-build starts long before the first brick is laid.