What is a self-build mortgage, and how does it work?
On a very basic level, a self-build mortgage is the same as any other type of mortgage – you take out a loan to purchase a property and pay the money back to the lender in regular installments plus interest. However, the big difference with a self-build mortgage is that while a typical residential mortgage will release the agreed funds in a lump sum, a self-build mortgage is structured so that sums are released in ‘tranches’ at stages along the building process
The way money are released will differ from one lender to the next, with some requiring more steps than others. The site purchase will be the first milestone, followed by the construction of the first floor, the installation of the eaves, the completion of the roof, and finally the completion of the structure. The mortgage will normally run on an interest-only basis until all funds are released, after which it will revert to a repayment mortgage.
Self Build Mortgage
The vast majority of people looking for their first or next new home will consider buying a newly constructed or existing house, flat, or maisonette, whatever best matches their vision of their ideal home. For a sizable minority, however, the path to their perfect home lies not in what has already been built, but in what they may build themselves – a home designed to their exacting specifications and built to demanding standards by builders they have personally vetted.
People who choose to build their own homes can have rooms that are just the correct size and number, open-plan or sectioned spaces to their choice, and every surface, fitting, and fixture down to the smallest detail customized to their preferences.
Self Build Mortgage Advice
A self-build mortgage can be difficult to secure and maintain during the construction process and after you’ve moved home. It’s critical that you acquire the correct counsel so that you can land a deal that fits your budget and timeline.
Advantages of Self Build Mortgages
Of course, the most significant benefit is being able to supervise the development of a property that is designed and built to your exact requirements. A self-built home can be a very rewarding project.
It’s also possible that the cost of building your ideal home will be less than the cost of purchasing an equal new build property in the same region. After all, property developers that build new homes have to earn a profit, and you won’t have to pay for that mark-up in this situation.
Another benefit could be the amount of Stamp Duty Land Tax you have to pay – if you have to pay any at all. Please take a look at our blog post about the Government Stamp Duty Holiday Program.
Disadvantages of Self Build Mortgages
Self-build mortgages are typically more expensive than traditional residential mortgages, with higher interest rates and other expenses. Lenders will also require a significant deposit, normally a minimum of 25% but often as much as 50%, depending on your specific circumstances. You may need to come up with a lot more money up front to cover the land acquisition and construction expenditures.
Self-build mortgage lenders will also require extensive documentation surrounding the construction process. You may be required to provide planning permit documents, floorplans, and a comprehensive cost prediction.
Also, unless you already have access to private accommodation through personal resources, you will need to cover your own accommodation in addition to your construction expenditures while the development is underway. Depending on the complexity of the project, you may need to pay off your present mortgage or rent, or rent another house for an extended amount of time.
Mortgage to buy land
The first step will be to locate the plot of land on which you want to build your dream home, and then double-check that it has the necessary building permits. If not, you’ll need to hire a planner and submit a planning application to the local government, which you can do even before you purchase the land.
You’ll be able to look into getting a mortgage to financing your self-build residence once the permissions are in place. Lenders will often offer between 50 percent and 75 percent of the land’s value, but not more than that. Because there will be fees each time the lender delivers a tranche of money, it may be more cost-effective to secure the largest mortgage available on the site and then use your own cash resources to fund the construction, if your personal circumstances allow. It’s always a good idea to discuss your plans with a self-build professional adviser so that they can determine which solutions are ideal for you.
Self Build Mortgage Rates
The interest rates for self-build mortgages are significantly higher than those on regular residential mortgages. As a result, we will typically seek out mortgage plans that do not impose penalties for early repayment or remortgaging, allowing you to more easily switch your mortgage to a new lender at a later date to take advantage of a lower rate, or pay off the mortgage with funds from another source.
Due to the risk of incurring excessive expenses, it’s a good idea to be in touch with your mortgage adviser in the lead-up to the end of any introductory offer period so that your remortgaging possibilities may be evaluated and your remortgaging application can be submitted as soon as feasible.
95% LTV Help to Build Scheme
The government has launched a number of initiatives to help self-builders. The establishment of the 95 percent LTV Help to Build Mortgage Scheme is one such approach.
In April 2021, it was revealed that the scheme will be sponsored by £150 million in initial funding, spread out over four years, with the goal of assisting between 30,000 and 40,000 self-build homes in the UK each year.
The scheme will take the form of the government’s present help to buy shared equity scheme, which is focused at the new-build sector. There are significant differences, such as the fact that the help to buy plan is now only available to first-time buyers and that the equity loan is paid to the developer. The applicant would secure a mortgage with a personal 5% deposit in the same way as the Help to Build initiative, but the 20% equity loan would be paid upon practical completion. After the construction is completed, the government loan is paid to the lender, lowering the loan to value to 75% of the construction cost.
The government’s action plan gives a timetable of the Help to Build Prospectus being issued in Spring and the applications for the scheme to be open in late summer.
Self Build Mortgage Lenders
Because self-build projects are such a specialised niche industry, your alternatives for a mortgage provider may be restricted. Few lenders venture into this area of the real estate market, and those that do are either extremely specialised or risk-averse, or both.
Our professionals at The Mortgage Centres are experts in every type of mortgage available throughout the market, including self-build mortgages, and will know exactly which lenders can fit your timetable and suit your needs. Naturally, a lot will rely on your own situation. We’ll also be aware with each lender’s requirements, including how they often approach self-build projects, what percentage of the land value they’re willing to lend, and, of course, which will provide you with the best terms.
It is our goal at Areton ltd Mortgage to make acquiring and administering your mortgage as simple as feasible and on the most favourable terms imaginable. We can get the most competitive self-build mortgage options available, including those from smaller, more specialist lenders, thanks to our strong contacts with lenders across the UK mortgage market. Call us today to learn more about how we can assist you with the construction of your dream house.