Self-Build Mortgages

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Self-Build Mortgages

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Self-build Mortgages – How do they work? 

Building your own home can be an excellent way to find yourself the perfect property. There is a lot involved, though, not least the financial side of things. We can help you find a suitable self-build mortgage and make sure you consider everything in your plans.

What is a ‘self-build’ mortgage?

A self-build mortgage is a way of funding a project to build your own home. It’s different from a residential mortgage in that money is given out in stages. 

You can spend the money on anything linked to the build – this might include buying the land, funding building materials and paying your contractor. The money is released at various stages of the build – for example once the land has been bought, the foundations are laid or the building is watertight. 

If you go over budget and cannot complete the next step, your mortgage lender won’t release any more stage payments. This protects them against the risk of funding the project.

What are the benefits and drawbacks of self-build homes?

The main advantage of building your own home is that it’s usually much cheaper than buying a property from a developer. You can also design it to suit your needs perfectly, unlike buying where you often need to compromise. Another advantage is that you only pay stamp duty on the value of the land, not the finished home. 

A key drawback is the challenge of finding a suitable plot, although the Government is trying to make this easier with Right to Build. Another consideration is that you will need to rent somewhere to live while building the property, which will increase the cost. 

A very important factor to consider is that managing your self-build project can be stressful and time-consuming, and you need strong budgeting skills to release sufficient funds at the appropriate time.  

Is it hard to get a mortgage on a self-build home? 

There are fewer lenders offering mortgages to help you build a house, and you will need to meet a number of criteria. How easy it is will depend on your specific circumstances – so talk to a broker to understand whether you are likely to get approval on this type of mortgage and what the interest rates might be. 

How much deposit will I need?

The deposit amounts vary depending on the lender, but typically you will need a deposit of between 20% and 25% of the total build costs.

How much can I borrow? 

You will need to have a clear budget for the build as part of the mortgage application. Make sure you have allowed contingency for unexpected costs. Each lender will have their own specific requirements about who they accept for a self-build mortgage. 

The amount you can borrow will be based on your income, outgoings and size of your deposit. 

Do mortgage lenders have strict criteria for self-builds?

Self-build mortgage products are seen as higher risk to the lender, so they usually look for good credit scores and little to no debts. You will also need a stable income. Some lenders might expect you to have arranged the land purchase (with planning permission) separately from the mortgage. 

What schemes can help me buy a self-build? 

A Government ‘help to build’ scheme was announced in April 2021 to support people to build their own homes. The details are due to be shared via the ownyourhome website once they are ready. Another useful source of information on self-build works is the Self Build Portal.

Can I part-exchange to buy a self-build?

Part-exchange is fairly common when buying a new-build property from a developer, but less so for those funding a self-build. We can help you explore how best to use the equity or sale proceeds from your home alongside your mortgage funds. 

How can The Mortgage Mum help me with a self-build mortgage?

Our team of advisors will help you explore all the options to build your own home. We will talk you through the key decisions and how self-build mortgages work, looking at the potential repayments on your mortgage, early repayment charges, interest rates and mortgage criteria. 

We will also compare products and lenders to find a suitable deal to achieve your goals – or explore other options such as bridging loans or equity release (please refer to the bottom of this web page for information on these products and how we can put you in touch with third parties who can advise you).

Contact us today for an initial chat about how we can help you.

Your property may be repossessed if you do not keep up with your mortgage repayments. 

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