Mortgages for self-build are a specialist product and many lenders do not offer them. However, the self-build mortgage market has expanded considerably in recent years and so long as your project is correctly planned and presented, you should have little difficulty in obtaining a mortgage.
The major difference between a self-build mortgage and a traditional mortgage is that with the self-build version you will receive your mortgage funds in several stages, as your house build progresses, rather than a single lump sum, when buying an existing house. Within this overall structure there are a number of variations.
A self-build mortgage may cover the purchase of the building plot (depending on the lender). For the build itself, the mortgage will be paid to you in 4-6 instalments upon completion of agreed stages of the build (e.g. completion of the foundations). There are two main types of stage payment mortgage – arrears and advance, the difference between them being in the timing of the payments.
With an Arrears Mortgage you will receive the instalments after each stage is completed. This is safer for the lender but may cause you cash flow difficulties unless you have sufficient funds of your own.
With an Advance Mortgage you receive your instalments before each stage is started. Due to the added risk to the lender, this type of mortgage is usually more expensive.
Most lenders offer an Arrears Mortgage although an increasing number now offer the Advance Mortgage. If you have sufficient personal funds and/or a very understanding builder, you will generally find it cheaper to go for the Arrears Mortgage as it should be cheaper.
How Much Can I Borrow?
The amount you can borrow for your self-build will vary from lender to lender. Some will only allow you to borrow for the build itself, others will offer a mortgage on both the land and the build. At the time of writing (2018) it is possible to borrow up to 95% of the value of the land and 90% of the value of the completed house from some lenders. But, many will not lend more than 75-80%. If you borrow a high percentage, it is likely you will have to pay a higher interest rate.
Mortgage Requirements and Restrictions
Every lender will impose some restrictions on the mortgage. These may include:
- Low Loan To Value (LTV) i.e. the amount they are prepared to lend in relation to the market value of the completed house. LTVs of 80% are the norm but tend to vary between 75% and 85%. This means the level of ‘deposit’ (own cash) required is generally higher than required for a conventional mortgage.
- Maximum amount of loan.
- Sufficient income for two mortgages if you intend to keep your existing mortgage during the build. Otherwise, you will have to sell your current home first.
- Insistence that all building work is undertaken by professional main contractor.
- Restriction on the types of the materials you can use in your build so that your house is easy to re-sell.
- Insistence that the house is detached and for owner occupation.
- Insistence that the planning consent for the land has a minimum amount of time remaining, for example two years.
- Insistence that appropriate insurance is in place during the building work itself and that an appropriate warranty is obtained at the end of the build.
There are over 30 providers of self-build mortgages in the UK. There are also specialist brokers such as BuildLoan and BuildStore. Some of these providers only deal with the self-build market, but many are high street lenders. A few of the providers only deal with a niche of the self-build market, such as eco-build.
Types of Mortgage
Remember even with Self-Build mortgages you are not necessarily limited to the conventional variable rate mortgage. It should be possible to locate fixed rate, tracker and self-certification mortgages.
Other funding options
Not everyone wants, or needs a mortgage. You may be able to fund your build in other, cheaper ways. For example, if you already own a house with substantial equity, it may be cheaper to re-mortgage your house with a larger loan and use this to fund your self-build. A re-mortgage on an existing property should always work out cheaper than a self-build mortgage. You may also wish to consider selling your existing property and moving into rented accommodation or a caravan on site.