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Self-Build Mortgage

What you need to know about a self-build mortgage

  • If you're planning to build your own home, a conventional mortgage won't be right for you. Instead, you'll need to apply for a specialist self-build mortgage.

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What is a self-build mortgage?

As the name suggests, a self-build mortgage is a loan you take out to fund a property you are building yourself.

The main difference from a standard residential mortgage is that you receive the funds in stages as parts of the build are finished, rather than as a single lump sum. This is to reduce the lender's risk and ensure that the money is spent as planned. This way, you won't run out of cash when you’re only halfway through the project.

Exactly when funds are released depends on the lender. However, you'll typically receive the first payment when you buy the land. You’ll then receive more when the foundations are laid and a further payment when the property is built up to eaves level.

Later payments are normally made when the roof is watertight and the interior walls are plastered. The last instalment is paid on completion.

Self-build mortgages provide good potential for first-time buyers looking for a more affordable way to get onto the housing ladder.

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What types of self-build mortgages are available?

There are two types of self-build mortgages:

  • Arrears: This is the more common type. Payments are handed out after each stage of the build is completed. This type of mortgage is better for people who have a lot of cash on hand to help pay for the project

  • Advance: Payments are released at the beginning of each stage, making money available when the bills for labour and materials are due. This removes the need for bridging loans or other short-term borrowing. This type of mortgage helps with cashflow and is better for people who have less money on hand to fund their projects. Bear in mind, though, that fewer lenders are prepared to offer this kind of mortgage

Interest rates on self-build mortgages are normally higher than on standard mortgages. Please note that MoneySuperMarket does not currently compare self-build mortgages.

How are funds released with a self-build mortgage?

The release of funds for a self-build mortgage is different from a standard mortgage, when money is released on completion of the buying process.

With self-build mortgages, stage payments are made, meaning that a lender will pay out a set amount at a specific point as your build progresses. If you are building your own property from scratch, then it’s most likely you’ll receive upfront mortgage payments at the following points in the build:

  • Purchase of the land (with proof of planning permission and, depending on the lender, drawings from a qualified architect)

  • Laying of the foundations

  • Construction of the property to eaves height, ahead of the roof going on

  • Roof complete and property wind and water tight

  • First fix

  • Second fix

  • Confirmation of property’s completion via a completion certificate

If you have an arrears self-build mortgage you will receive mortgage payments when the work is complete at each stage. If you have an advance self-build mortgage, funds will arrive ahead of each stage, meaning you can pay contractors and suppliers quickly.

If you are self-building in a group, or using a custom-build method, the release of funds differs slightly, with the eaves height stage usually not included in the terms of this kind of self-build mortgage.

To be sure, speak directly with your lender for exact details.

What are the advantages of a self-build mortgage?

When deciding whether a self-build mortgage is the right choice for you, there are a few factors to take into consideration. Let’s start with the positives:

  • Tick

    Save money on stamp duty

    Stamp duty isn’t levied on the cost of building work or the value of the property once the work has been completed. You only have to pay duty on the value of the land itself and only then if the cost exceeds £125,000

  • Tick

    Might work out cheaper if you plan well

    If you plan properly, you may be able to cut costs overall. In fact, by picking the material and labour yourself, you might spend less than what you would if you bought a ready-made home

  • Tick

    Higher property value

    Another advantage is that self-builders also often find that the value of the finished property is significantly higher than the cost of the land, the materials, and the labour put together

What are the disadvantages of a self-build mortgage?

As with everything, though, a self-build mortgage comes with its own set of drawbacks too. Here are some disadvantages you may want to take into account:

  • Cross

    Risk of losing money

    Yes, a self-build mortgage may indeed work out cheaper than other solutions. But it’s also true that if things don’t go to plan or you’re not able to stick to your plan, you could end up losing finances and financing

  • Cross

    Large deposits and higher interest rates

    Generally, lenders offering a self-build mortgage will ask for a larger deposit, which could be up to 50% (if not more). What’s more, interest rates and fees are likely to be higher than traditional mortgages

  • Cross

    Can be a time-consuming project

    Finding the right piece of land and sourcing the architects, builders, and materials can be a lengthy, time-consuming process. Therefore, you will need patience and the desire to manage many different aspects

Which mortgage providers offer self-build mortgages?

The rise in interest rates since late 2022, coupled with market instability, means that the number of mortgage providers offering self-build mortgages is limited to specialists, with most larger lenders tending to focus on regular residential mortgage products.

Keep an eye out for deals from lenders such as:

  • Halifax

  • Lloyds

  • AIB (in Northern Ireland)

  • Ecology Building Society (for specialist green projects)

  • Scottish Building Society

  • BuildLoan and BuildStore - the latter is a service that can help with finding land, securing planning and an architect. BuildLoan is part of the same company and can arrange financing. Many major lenders demand going via BuildLoan as it can provide expert advice

It is highly advisable to go via a specialist mortgage broker in order to secure a self-build mortgage.

What else should I know about a self-build mortgage?

First things first, there is more paperwork involved when you take out a self-build mortgage, as you will have to produce detailed plans for the property. The additional supporting documentation your lender requests could include the following:

  • Planning permission

  • The construction drawings and specifications

  • Your Building Regulations approval

  • Proof of site insurance and structural warranty

  • Information on your architect’s professional indemnity cover

You will also have to provide a projection of the costs involved. Not to mention that most lenders will also want to see that planning permission has been granted.

As a general rule, you will need to put down a deposit of at least 25% of the total project value. However, there are situations in which you may be asked to stump up as much as 50%. Remember that, on top of this deposit, you will need to pay for alternative accommodation while your new property is being built.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Can I change to a normal mortgage once the build is complete?

In most cases, it is possible to remortgage once your self-build is complete and certified by a surveyor.

To do so, you’ll need to have it valued and the property must be habitable. Your mortgage lender or building society will then offer you a regular residential mortgage, based on a more affordable interest rate.

If you want to remortgage, it is vital you check if there are any early repayment fees for leaving your existing deal. A mortgage advisor is essential if you want to make a new mortgage application, as they will be able to help you find the best deals available.

Front door of a house

Can I get a mortgage for just land?

While some specialist lenders will offer mortgages just for land, you will need a large deposit, sometimes as much as 50%. This approach may work if you already have a large amount of capital for both a deposit and the building works.

However, lenders are likely to require proof of planning permission. Self-build mortgages tend to be more affordable when it comes to the deposit required, as well as being easier to come by, with more lenders offering such deals.

Read our guide to loan-to-value to learn more.

Compare mortgage options with MoneySuperMarket

Using a mortgage comparison tool can help you get a good idea of the kind of mortgage deals available. When you enter your information into MoneySuperMarket’s mortgage comparison tool, you’ll be able to compare example mortgage quotes from different providers.

Just tell us a bit about yourself, your financial situation, and your plans. We’ll help you scour the market in search of the mortgage deal that is right for your pockets and requirements. Then, feel free to use our mortgage calculators to find out how much each deal would cost you overall.

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A self-build can be done in two ways. There’s the DIY route, where you do most of the work yourself and use skilled tradesmen like plumbers and electricians only where necessary. The alternative is to manage the process and employ a surveyor, an architect, and various tradesmen who do most of the work on your behalf. You can even arrange for a contractor to manage the whole project for you.

Whichever route you choose, as mentioned, you won't be able to fund it with a standard residential mortgage. Projects like this will always require a self-build mortgage.

If you want to have a better chance of being approved for a self-build mortgage, there are a few steps you can take.

Firstly, get planning permission, as you will need to start constructing on a plot of land. In the meantime, start saving for a large deposit. As mentioned, lenders who offer self-build mortgages tend to ask for a heftier deposit.

Then, make sure to apply for a mortgage that you will be able to repay. Lenders will want to see your credit score, including income and outgoings, so they’ll have the chance to assess whether you’d be a reliable borrower. Therefore, if possible, it’s also a good idea to clear any existing debts and build your credit score, as this will improve your chances of being accepted for a self-build mortgage.

Finally, it’s always wise to speak to a mortgage broker. They can point you in the right direction and help you find the most suitable option for your needs.

In truth, this depends entirely on your lender, your personal affordability, and your own overall circumstances. But generally, if you own the land you intend to build on, you can expect to borrow up to 75% of the expected property value.

However, if you do not own the plot of land, there are many factors that the mortgage provider will need to take into consideration, including building costs and land purchase. This can have a significant impact on how much funding you can expect to obtain.

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