From applications to delays and from approval to completion, buying a house is rarely a smooth process. But what happens if you are starting from scratch? What if your home isn’t even built yet? This is where a self build mortgage comes into play.
A self build mortgage is a way to finance the build of a brand new home. With cash released in stages, the funds help cover the costs of the materials, the build and the contractors you’ll be using. They are a little more complex than traditional mortgages so in this blog, we explain how you get one, what they are and how much it’ll cost to get a self build mortgage.
What is a self build mortgage?
A self build mortgage is a form of property finance that supports the purchase of a house that is not yet built. With funds released in stages, these mortgages help you pay for the build and everything that comes with it. Where traditional mortgages see the borrowed amount handed over in a lump sum, self build mortgages see funds released in batches that reflect the progress of the build.
Sounds simple enough? The more progress you make, the more of your total mortgage you have access to. Well, sort of. Self build mortgages work in two ways. Advance stage payments and arrears stage payments. One sees payments guaranteed at the start of each stage, the other sees payments made upon completion of each stage of work.
Advance stage payments
With advance stage payments, guaranteed funds are released at each stage before the work takes place. This type of self build mortgage is beneficial if you do not have the funds to hand to start the build. You simply pay for each stage as it arises with the funds lent to you. Should you have opted for a timber frame house, for example, you’ll need to pay for the structure before it’s shipped. This type of self build mortgage will allow you to pay for that. Unfortunately, there are not many lenders offering this type of product so it would be beneficial to speak to a self build mortgage broker who can source the current deals and providers.
Arrears stage payments
The arrears stage payment self build mortgage sees payments released as each part of the build is completed. This is beneficial to lenders as they will only be lending an amount that matches the cost of the project. Unlike advance stage payments, the amount you receive is not guaranteed. This is because the lender will conduct interim valuations to ensure they are not giving you too much money. Think of arrears stage self build mortgages as you getting paid back for fronting the money for each part of the build. However, if the valuation for any, or each stage comes in lower than the amount you have spent, you could find yourself with cashflow problems and see the completion delayed.
With both advance and arrears stage mortgages, lenders may be open to lending for the land purchase as well as the property build. Some will only lend on the build but not the land acquisition. You should investigate this with your self build mortgage broker, so you are clear in what your product covers.
When are the funds released for a self build mortgage?
As you’ll have seen, self build mortgages see their funds released in stages rather than in one lump sum. What is released when can depend on the type of property you are building but it will commonly follow the flow of what we have listed below:
- Purchase of land
- Initial costs and foundations
- Wall plate level
- Wind & watertight
- First fix and plastering
- Second fix and completion
How much can I borrow on self build mortgage?
Just like a traditional mortgage, self build mortgage applications take into account your earnings, any savings, your personal circumstances and your affordability. From this, lenders can offer an amount for you to fund your project. That is where the similarities with traditional mortgages end as far as borrowing amounts go. With a self build mortgage, the amount you borrow is not limited by the current value of the property. Instead, you borrow a percentage of the projected costs. Some lenders will be willing to offer up to 85% of the costs for the plot and 85% for the build cost. In some cases, as much as 95% of the end value may be offered.
Across lenders, you could easily find vastly different amounts offered. Some have specific limits for how much can be borrowed for the land purchase, the costs of the build and the estimated value the house could sell for.
Can a first time buyer get a self build mortgage?
Yes. Whilst first time buyers often find the availability of mortgage products somewhat limited, self build mortgages are available. They are often harder to find but they are out there! Just be wary that deposits can be high though. In some cases, a self build mortgage for a first time buyer may require a deposit of 25% but it could even be as high as 40%.
To apply for a self build mortgage as a first-time buyer, you’ll need a good credit history, proof of income, and details of the project. These details will need to include that you have obtained proof of planning permission, have buildings regulation approval, plans and specifications of the build and more.
How much deposit for a self build mortgage?
Deposit requirements for a self build mortgage can vary depending on whether you want an advance payment or arrears payment product. In some cases, deposits for advance stage payment mortgages can be as low as 5% but you’ll commonly find them offered with a 15% deposit for the land and build costs. Lenders, of course, prefer a larger deposit and it is not surprising to see 25% being requested as a minimum in some cases.
Are self build mortgages hard to get?
They are, and they aren’t, partially because the number of available lenders is quite small, but should you find one and be able to prove your affordability and provide details of the plans for the build, you should find the application and approval process quite simple.
You’ll need the same paperwork as a traditional mortgage application, but you should also support your efforts with:
- Copy of planning permission documents
- Copy of construction drawings and specifications
- Copy of total project cost estimate
- Copy of Building Regulations approval
- Copy of site self build insurance and structural warranty
- SAP calculation
Even with all this information, you may still be refused a mortgage. Some lenders are not happy to lend for certain construction types and some may want you to work to a fixed budget. As a result, it would be advised to also factor the following into your project cost estimate:
- Land purchase and fees
- Project management and health & safety compliance
- Demolition or grounds clearance
- Design fees
Finally, you’ll need to pay for a valuation that demonstrates the current value and expected final value. From application to approval, a stage release mortgage for a self build can take approximately three months.
What are self build mortgage interest rates?
Interest rates for self build mortgages can be higher than your traditional mortgages. Rates can vary and are typically between 7%-9% but can be higher or lower depending on the amount borrowed, the deposit provided and your circumstances.
Some self build mortgage products are interest-only where you pay back just the interest on the loan during the building period. The mortgage will then switch to a more regular repayment mortgage with lower interest rates once the build is completed. For this to happen though, the property will be valued again by a RICS surveyor to ensure a true valuation is given.
Self build mortgages can be complicated and are often tricky to find. Our team at Mortgage Saving Experts can help you find the best possible mortgage deals so you can finance your self build project without worry or stress. A complex mortgage such as one for a self build property may seem daunting, let us take away that concern today so you can begin the project that leads to the house of your dreams! Contact us today to see how.
