Self-build mortgages

What’s a self-build mortgage?

A self-build mortgage is a loan to finance buying a building plot and constructing your own home on it.

Unlike a conventional mortgage, where the money’s handed over to pay for the property in one go, self-build mortgage funds are released in stages, as each part of the build is completed.

How to find a self-build mortgage?

There are not many self-build mortgage lenders on the market. But for the best chance of finding one you’ll qualify for, speak to an independent mortgage adviser.

Normal mortgage	Self-build mortgage
Funds are released all at once	Funds are released in stages as the build progresses
Interest rates and fees are typically lower than a self build mortgage	Interest rates and fees are typically higher than an ordinary mortgage
Property will need to meet lender’s criteria for construction and condition	Each stage of construction will have to meet lender’s criteria, which may include non-standard construction methods
Usually only for properties in habitable condition	As well as a full build, can be used to finance renovation of an uninhabitable building

Traditional mortgages versus self-build mortgages

There are a few important differences between an ordinary residential mortgage and a self-build mortgage:

What types of self-build mortgages are there?

Your choices aren't quite as straightforward as a fixed rate or a tracker – although these are both options for self-build mortgages.

Release of funds – in advance or post-construction – As mentioned, most self-build mortgages release funding in stages and most only do this after construction of a particular section is completed.

If you don't have the cash flow to complete the work in advance of receiving funds, you may be able to find a mortgage that will hand over funding for each stage in advance.

Renovation mortgage – It can be extremely difficult to get an ordinary mortgage for a dilapidated property, or for non-residential buildings such as barns. But some self-build mortgages can be used to renovate or convert buildings rather than building from scratch.

Custom-build mortgage – Custom builds are an increasingly popular way of self-building.

It involves buying a plot from a developer and then, rather than organising your own build, you're presented with a catalogue of options on the type of house you build upon it.

Although custom build might take some of the stress out of the equation for the inexperienced, to fund it you'll still be limited to a self-build mortgage released in stages.

Some custom-build companies may have agreements in place with a self-build mortgage lender, but remember that you're free to choose your own and it's a good idea to speak to a mortgage adviser to find the right option for you.

Advantages and disadvantages of self-build mortgages

Consider the pros and cons of a self build mortgage while you’re planning how to finance your house-build:

Advantages

• It’s a way to get substantial funding to build your home
• Although the mortgage might have higher interest than a conventional one, you may find that’s balanced out by the money you save by self-building

Disadvantages

• You might need a larger deposit, typically of at least 50%
• Interest rates and fees can be higher than for conventional mortgages
• You won’t be able to get funding for the next stage of your build until the lender is satisfied the current stage is completed. That could hold up cash flow for buying materials and booking tradespeople
• You’ll have a relatively small choice of lenders

Do I need a mortgage to build a house?

Not necessarily. There are a few alternatives to a self-build mortgage you could look at to fund your project:

Savings – If you’ve got enough money in savings to buy a building plot, buy materials and pay builders, you won’t need a self-build mortgage. This is likely to be the most cost-effective way to fund some or all of your project.

Some self-build mortgages will only lend on the building itself and not the land, so you may need a lump of savings to purchase land in the first place.

Remortgage – If you have a large amount of equity in your current home, you might be able to remortgage that instead to free up funds and avoid having to take out a self-build mortgage.

Of course, this is only the case if you're planning to stay in your current home while the build progresses.

Loan – If you only need a relatively small amount to top up what you have saved, a personal loan or a loan secured on another property you own might be an option.

A personal loan will typically let you borrow up to around £25,000.

A secured loan might allow you to borrow more, but remember, you'll be at a risk of losing your existing home if you fail to make your repayments on time.

Bridging loan – A bridging loan might be an option for short-term funding to cover the land and building work, before taking out a conventional mortgage to repay the loan once the project's complete.

Bridging loans have high interest rates and this can be a high-risk strategy - you need to consider how you'll repay the loan if the building work takes longer than planned or you can't get a mortgage at the end of it.

A bridging loan usually places a charge on both your current home and your future one, so your current property and your project may both be at risk if you can't keep up with repayments.

Remortgaging your self-build home – Due to the typically high interest rates on self-build mortgages, it's a good idea to think about remortgaging to a standard mortgage once the build is finished.

Most self-build mortgages have early repayment charges, but if you can get a substantially lower interest rate on a standard mortgage, it might still be worthwhile.

How does a self-build mortgage work?

A self-build mortgage releases the funds.

As you complete each section of the build, with the lender potentially inspecting the work before each payment is made.

Some lenders will provide the money before the work is completed, while some may only pay once each stage is finished.

If that's the case then you may need a loan to cover the work before you receive the cash, but ideally you'll have savings in place and a good cash flow.

Are self-build mortgages more expensive?

Yes, lenders consider them a bigger risk so interest rates and fees are usually higher.

Only a few lenders offer them, so there’s less competition for them to offer lower rates.

You’ll also have to take into account other costs, like getting planning permission and maybe buying a plot before you can get a mortgage.

Can I get a self-build mortgage as a first time buyer?

Yes, but lenders might be more cautious about lending to you.

It might want to see more evidence of income, or need you to put down a larger deposit, for example.