What kind of self-build mortgages are on offer?
Not every wannabe self-builder has savings to fund the construction of their dream home. But it needn’t cause issues. Self-build mortgages are a feasible option for those without the funds.
What is a self-build mortgage?
A self-build mortgage allows you to borrow money to build your own home. You cannot use a typical residential mortgage to fund the construction of a new property.
The main difference is that a self-build mortgage releases cash in stages rather than providing one big lump sum like a typical residential mortgage. This helps to ensure that you don’t run out of funds halfway through your project.
Rates can be typically higher than a bog-standard mortgage as they are less available and less competitive.
Types of self-build mortgages
There are two types of self-build mortgages to consider.
1/ Arrears mortgages
These types of mortgages offer payments after each stage of the build is complete. A great finance solution for people who have a lot of cash on hand to help pay for the project.
2/ Advance mortgages
Those self-builders with less cash on hand to fund their self-build home will find this kind of mortgage suits their needs. Payment is released at the beginning of each stage, making cash available when labour and materials’ bills are due. A perfect mortgage for managing cashflow and removes the need for short-term borrowing or bridging loans.
Specialist mortgages
If you’re planning to build an energy-efficient, sustainable self-build property, it’s worth checking out a specialist mortgage.
Ecology Building Society, a specialist lender, supports self-builders in the UK who want to build an energy-efficient and sustainable home. They lend to support the purchase of the plot and the costs of your self-build project.
How do I get a specialist self-build mortgage?
Demonstrating that your self-build project will have an environmental impact is key to securing a specialist mortgage.
Those who use locally sourced materials and feature renewables such as heat pumps, solar thermal and photovoltaics are in with a high chance of securing lending. Consider sustainable materials like timber frame and modern methods of construction which focus on offsite manufacturing.
Don’t forget that outline planning permission needs to be in place to apply for the mortgage and detailed planning needs to be confirmed before any mortgage funds are released.
According to their literature, Ecology normally releases up to 80% of the plot purchase price or value of the property if you already own the land and subsequently, the money required to cover the build costs. As you continue with your build, staged payments of up to 80% of your increased property value as the build progresses will be released – this will help you track your budget and planning.
This type of mortgage may be suitable if you are able to make a 20% deposit for your plot and further funds to commence the initial stages of the build. Ecology recommends 20% of your total build budget as a good starting point to begin your self-build project.
What do you need to secure finance?
We won’t sugar coat this – there is plenty of paperwork involved 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, construction drawings 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.
Where to apply for a self-build mortgage
Finding a lender involves gathering 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. Money comparison sites like moneyfactscompare.co.uk and money.co.uk are a good starting ground.
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.
How much finance you’re able to secure simply depends on your personal affordability and on your lender. It can be easier to borrow if you own the land, but if you don’t this could impact how much funding you receive as land purchase and building costs are taken into consideration.
