Taking out a self-build mortgage

A self-build mortgage could be the answer to financing your dream home

Some self-builders might be fortunate enough to fund their projects solely from savings but unless you have spare cash lying around, you’ll need a mortgage to fund your self-build.

The conventional mortgage you use to buy a house is very different from a specialist self-build mortgage. With a self-build mortgage the money is released in stages as the build progresses rather than obtaining a lump sum. This is to reduce the lender's risk and ensures that the money is evenly spread so it doesn’t run out halfway way through your project.

Mortgage offers vary. There are different ways in which this money can be released and your choice of product will depend on your own particular circumstances. 

Every self-build project has clear stages from the initial digging of the foundations to the final fix and at each stage the value of the build increases. For example, in a traditional brick and block build you’re looking at six difference stages: the purchase of the land, preliminary costs and foundations, wall plate level, wind and watertight, first fix and plastering and finally second fix to completion.

Arrears or advance self-build mortgages

There are two types of self-build mortgage each defined by when you get money during the build.

There are stage payment schemes that work in arrears, typically in stages: after foundations, at roof plate level, after internal walls and plastering, and finally on completion. With this type of scheme you are only paying interest on the part of the mortgage you have actually used.

There are also schemes that pay in advance by taking into account the land value and advancing against this - these can be handy if finding liquid funds to start the building project and the move to first stage payment level is going to be a problem otherwise. With this type of scheme there may be a mortgage premium insurance charge, so check what this may be before committing yourself.

Finding a lender

It is a good idea to gather direct quotes from prime lenders like banks and building societies to ensure you get a good cross section of the market prices and offers for comparison. Deposits, rates and terms vary depending on planning permissions and the stage of the building. Always check what you are being offered and the requirements and conditions criteria for each stage for the process.

Be prepared to do your fair share of paperwork when it comes to taking out your self-build mortgage. You will have to produce detailed plans for the property. Lenders will request a projection of the costs involved, building regulation approval and they will also want to see that planning permission has been granted. You may also be asked to produce insurance documents and details of your builder and their qualifications.