Self-build mortgages explained

Between 2021 to 2022, over 859,000 residential property transactions took place in the UK. As is the norm, the majority of these transactions involved buyers moving into new ready-made properties and sellers moving into homes of their own.

But some buyers break the mould. According to the government, over 13,800 homes a year are constructed by self-builders - that is, homeowners who built their houses from scratch.

As you can imagine, these projects can be extremely expensive to finance - which is why, like most residential property purchases, self-builds are often funded by mortgages.

What are self-build mortgages? Are they hard to get? How much money can they provide?

What are self-build mortgages?

Self-build mortgages are specialist mortgage packages designed for borrowers who want to construct their own homes. Generally, these mortgages have significantly higher interest rates, and are more difficult to obtain, than standard mortgages - but the contrasts don't end there:

• Unlike a standard residential mortgage, self-builds are released in stages. These stages correspond with the milestones of the property's construction, reflecting its growing value.
• Self-build mortgages have the same standard requirements as other residential mortgages - but they go a step further, requiring an initial plot purchase, planning permission, construction drawings, cost estimates and much, much more.
• Whereas standard residential mortgages are limited by the value of the property, self-build mortgages aren't. However, every self-build lender has a max amount they’re willing to loan - usually 75% of the property's accumulative value.
• When construction is complete, you are prompted to find a new mortgage.

What can I build with a self-build mortgage?

It completely depends on the plot you’ve purchased, the planning permission you obtain, and the lender you pick to finance your project. Some plots of land are limited by jurisdictions related to the local council. The best place to find land fit for purpose is through a local estate agent or a magazine or brochure that advertises land for sale.

When do you get your money with a self-build mortgage?

Funds for a self-build aren't released immediately - they are released as and when the construction of your new home progresses. For brick and mortar builds, this is usually divided into six stages:

1. Purchase of land
2. Labour, material costs and foundations
3. Wall plate level
4. Wind and watertight
5. First fix and plastering
6. Second fix to completion

The exact timing of these cash injections depend on the type of self-build package you choose.

Types of self-build mortgages

Whatever self-build mortgage you apply for, the funds you receive will never cover the costs completely. As with a standard mortgage, you'll need to save up a significant deposit to front the rest of the costs yourself.

Arrears self-build

With an arrears style mortgage, you pay for each stage of construction upfront and are reimbursed by the lender upon completion. This type of mortgage can be hard going for those without a good financial foundation to begin with.

Advance self-build

An advance self-build allows you to borrow money at the beginning of each stage of construction. This is the most 'friendly' form of self-build mortgage, as you need less money to get your build off the ground.

How much can I borrow with a self-build mortgage?

On average, self-build mortgages cover 75 - 80% of the costs required for construction, but this varies from lender to lender.

As with standard providers, a self-build mortgage lender judges your viability based on your financial income and outgoings. Through an affordability calculation, lenders assess the risk of debts like loans and credit cards.

The type of self-build, its location, the materials used, construction method, and schedule of costs all have an impact on the interest rate you end up with. It’s worth bearing in mind that lenders also assess whether you have the right expertise to oversee a self-build project.

Unlike a standard mortgage, your borrowing is not limited by your plot or property's current value - after all, your dream home doesn't exist yet. However, every lender has a maximum loan they can lend out.

What do I need to apply for a self-build mortgage?

Like any mortgage, preparation is key when submitting an application. Unfortunately, there’s a lot more to prepare for with a self-build mortgage!

Building a home from scratch requires a plethora of planning, paperwork and permissions before you can get financed. What's more, you'll need to spend a bit of money on top of the initial deposit to pay for things like planning permission.

Remember: Always check with your prospective lender on their exact specifications. Self-builds are expensive projects and you can’t really afford to make mistakes.

Residential mortgage application requirements

As with any mortgage, you need evidence of your monthly goings and outgoings, along with a number of documents that vouch for your financial security:

• Proof of identity (driving licence or passport).
• Proof of current address.
• Proof of deposit.
• Information regarding your employer (or business if self employed).
• Three to six months of payslips and bank statements, as well as your last P60 or self assessment returns.
• Proof of any benefits.
• Solicitor and estate agent contact information.
• Details of regular monthly outgoings like childcare costs, utility bills, Council Tax, insurance etc.

Details regarding existing residence

Your current living situation also plays a role in the amount of money you can get with a self-build mortgage. Whether you're renting out or have an existing mortgage deal, details of the agreement should be provided in your application, along with landlord/lender details, your monthly rent/repayments, and your Loan To Value (LTV) ratio if applicable.

Valuation of plot and projected end value

Self-build hopefuls must include the purchase price of the plot and their property's projected value in their mortgage application.

While your application is being considered, the lender will send someone round to value the plot of land you’ve purchased and estimate its potential end value. If these figures corroborate, they will confirm your application as accurate and legitimate, leading to the release of funds.

Some self-build lenders require valuations at each stage of the property's construction. This is to mitigate the risk of a self-built property, by ensuring its gradual growth in worth.

Project costs and budget control

Your lender's underwriter will be looking for a good deal of detail regarding the costs of your project and budget management. That means you need to demonstrate your research:

• How much was the land purchase? Any associated fees?
• Architect's design fees, construction drawings and specifications?
• How much do you expect building materials, transportation and labour fees to be?
• Who’s managing the build and does the site have health and safety compliance?

There are lots of costs to think about! And your bank or building society will want the full breakdown before they lend to you.

Outline planning permission and Build Regulations approval

If you’ve obtained planning permission and Building Regulations approval, you should attach these documents to your application.

Remember: Some lenders won't lend money for particular constructions. Always check with their specifications to ensure they’re the right lender for you.

Insurance and warranties

Some self-build lenders won't release the initial funds unless you've taken out a structural warranty policy.

Structural warranty policies are a type of insurance that protects you and your mortgage provider from any structural defects that may arise following the completion of building work.

Unfortunately, standard home insurance policies can be insufficient for self-build owners. So when you take out a structural warranty, look into a specialist self-build and renovation insurance policy. This will protect you in case anything goes wrong during development.

What self-build mortgage lenders are there?

There are a number of lenders which finance self-build projects, but they are fewer than those who lend standard residential mortgages. Self-build lenders are specialists, which means they have less competition. As a result, self-build mortgage rates tend to be higher.

Can I compare self-build mortgages?

Unfortunately not. Popular comparison sites like MoneySuperMarket.com or GoCompare.com do not allow you to compare self-build mortgages because they are a limited, specialist product.

So how do I find a self-build mortgage?

Because of their limited supply, we recommend consulting an independent mortgage adviser or broker to find the perfect self-build mortgage.

Do I stick with a self-build mortgage when the build is complete?

No! Because their interest rates are high, self-build mortgages are unsustainable once your property's construction is complete. In fact, most lenders offer you a product switch to one of their more attractive residential mortgage deals - but you should always scout all the packages available before making another commitment.

You can read more about the process of remortgaging here. We cover everything from fixed-rate to tracker mortgages. If you're having trouble deciding which package is right for your budget, consult a mortgage broker.

Are self-build mortgage interest rates higher than standard mortgages?

Yes, they are higher than standard mortgages. Self-builds are perceived as high risk for two reasons:

• The projects they finance aren't complete yet.
• There are a number of risk factors involved in their construction.

As a result, their rates are higher than those of a typical or equivalent residential home loan. At the time of writing, interest rates for standard fixed-rate mortgages stand at 3-6% per annum, while self-builds vary from 5-9.5%.

This may sound expensive, but most borrowers can remortgage to a cheaper rate once construction on their new home is complete.

Lenders have different rules for when you can remortgage - some allow you to six months after completion, whereas others require two years. As with all mortgages, you should check the criteria carefully before signing an agreement. And be wary of Early Repayment Charges!

Summary: Self-builds require a clear vision

If you have the finances and vision to kickstart your own home, then a self-build mortgage might be the right choice for you!

It's worth nothing however, that with the advent of Brexit, building materials are now costing UK homeowners than ever. Simple home developments like extensions and loft conversions are now costing homeowners 20% more than they usually would.