Taking on a self build project to create your own home from the ground up can be an exciting and rewarding journey. However, financing this type of property venture is different from buying a ready-made home. That’s where a self build mortgage comes into play. In this comprehensive guide, we explain what a self build mortgage is, how it works, the different types available, and what to consider before applying. Whether you’re a first-time self builder or an experienced developer, understanding the key aspects of self build mortgages is vital for making informed decisions. 

 

What Is a Self Build Mortgage?

A self build mortgage is a specialist type of mortgage designed specifically for individuals who intend to build their own home. Unlike a traditional mortgage, where funds are released in one lump sum upon completion of the home purchase, a self build mortgage releases funds in stages as the construction progresses. This staged approach reflects the incremental nature of building a property and helps ensure that funds are available when required during each key development phase.

 

How a Self Build Mortgage Works

With a self build mortgage, money is provided in instalments rather than a single upfront payment. This is intended to reduce the risk for both the lender and the borrower, as it ensures that funds are used only when the corresponding stage of construction has been completed and verified.

 

Generally, funds are released at the following key stages:

 

• Purchase of the land (if not already owned)
• Initial groundwork and foundation laying
• Construction up to wall plate level (just below the roof)
• Roof completion (wind and watertight stage)
• First fix (plumbing, electrics, internal structure)
• Second fix and internal finishes (kitchens, bathrooms, painting)
• Completion and sign-off by Building Control

 

Lenders will often send a valuer or surveyor to inspect the property before releasing each tranche of the mortgage funds to ensure the build is progressing as planned and the value of the property is increasing appropriately.

 

Types of Self Build Mortgages

There are two main types of self build mortgage products, and the key difference lies in when the funds are released during construction:

 

1. Arrears Stage Payment

With an arrears stage payment mortgage, funds are released after each stage of the build has been completed. This means you’ll need access to cash or other financing to fund the early parts of the project until reimbursement is received.

 

This type is generally more common and may suit those with savings or who have already sold another property. However, it can present challenges for those who require upfront cash to commence construction.

 

2. Advance Stage Payment

An advance stage payment mortgage releases funds at the beginning of each stage, enabling you to pay for labour and materials before the work is completed. This can be particularly useful for those without large savings or for managing contractor cash flow.

 

Advance mortgages are less common and may be subject to additional requirements such as a higher deposit or increased scrutiny of the build plan and budgeting.

 

Eligibility Criteria for a Self Build Mortgage

Lenders offering self build mortgages will have specific eligibility criteria, which can vary depending on the individual lender and your personal circumstances. However, general checks may include:

 

• Affordability assessment based on income and outgoings
• Credit history and credit score checks
• Detailed build plans including architectural drawings and planning permission approval
• Costed build schedule and timeline
• Evidence of contractor insurance and necessary construction warranties (e.g. NHBC, LABC, or equivalent)

 

Deposit Requirements

Self build mortgages typically require a higher deposit than standard residential mortgages. This is due to the perceived higher risk to the lender. Many providers require a deposit of at least 25% to 30% of the total project cost, which includes both the land and the construction work.

 

If you already own the land outright, this asset can sometimes act as the deposit, depending on the lender’s valuation and criteria.

 

Interest Rates and Repayment Options

Interest rates for self build mortgages are often higher than those for standard residential properties. This reflects the additional risk and complexity involved in construction projects. Once the build is complete, it may be possible to move the mortgage to a standard residential mortgage product with potentially lower rates, if eligible.

 

Repayment options typically include:

 

• Interest-only during the build period, with switching to repayment after completion
• Full capital and interest repayment from the outset

 

Some lenders may also offer the option to roll up the interest payments during the build, adding them to the total mortgage balance to be paid off after completion, although this depends on the specific product features and criteria.

 

Planning and Timeline Considerations

Self build projects typically take between 12 to 24 months to complete, depending on complexity, contractor availability, and unforeseen delays. This makes having a well-planned timeline essential, not only for construction purposes but also to remain within the lender’s terms for staged payments.

 

Planning permission is a crucial requirement before applying for a self build mortgage. Most lenders will not proceed with an application until full planning consent is in place. You’ll also need to provide:

 

• Architectural drawings
• Building Regulations approval
• Structural engineer reports (if applicable)
• Schedule of works and budget

 

Land Purchase: With or Without Planning Permission?

If you’re purchasing land as part of your self build project, you have the choice of buying land with planning permission (‘land with outline’ or ‘full planning consent’) or without it. Most lenders require full planning permission before lending funds. Land without permission typically represents a higher risk, and acquiring permission can be a time-consuming and uncertain process.

 

Additionally, the cost of land varies significantly depending on location, size, and access to utilities. All these factors should be factored into your initial budgeting.

 

Budgeting Accurately for Your Build

One of the most important aspects of any self build project is establishing a realistic budget. A detailed financial plan should cover:

 

• Land acquisition or cost of any existing loans on the land
• Planning and design fees (architects, surveyors, planning authorities)
• Construction costs (materials, labour)
• Utilities and infrastructure (water, electricity, internet, sewerage)
• Contingency fund (usually 10-15% of the total build cost)
• Insurance (site insurance, structural warranties)
• Lender valuation and arrangement fees

 

Having a contingency budget is essential, as unexpected costs commonly occur during a build project. Demonstrating to a lender that you have prepared for cost overruns could strengthen your mortgage application.

 

Insurance and Warranties: A Vital Requirement

Most self build mortgage lenders will require you to have specific types of insurance in place before and during the build. Common requirements include:

 

• Site insurance to cover risks such as fire, theft, or vandalism
• Public liability insurance if people will be attending the site
• Structural warranties or a professional consultant’s certificate

 

Warranties typically cover the building for structural defects for a period of 10 years after completion. These are often a requirement not just for the mortgage during the build, but for any future remortgaging or selling of the property.

 

Self Build Mortgage vs Renovation Mortgage

It’s important to distinguish between self build mortgages and renovation mortgages. A self build mortgage is suited for projects where the property is being constructed from scratch, usually from a vacant plot of land. A renovation mortgage, on the other hand, may be more appropriate where an existing structure is being upgraded or significantly altered, such as converting a barn or refurbishing an old home.

 

While both mortgages may offer staged payments, the eligibility and criteria will differ. Understanding which product suits your needs can help ensure a smooth financing process.

 

Pros and Potential Challenges

Advantages:

• Opportunity to design a home tailored to your specific requirements
• Potential to increase property value compared to total build costs
• Possibility of improved energy efficiency and lower future running costs

 

Challenges:

• Higher deposit requirement compared to standard mortgages
• Need for detailed planning and project management
• Funds released in stages, which can affect cash flow
• Possible delays or cost overruns impacting the budget

 

Common Pitfalls to Avoid

Self build projects come with a range of complexities, and careful planning can help avoid some of the more common pitfalls:

 

• Underestimating costs and timescales
• Failing to obtain proper planning permission before applying
• Lack of contingency budget
• Attempting to self-manage trades without experience
• Choosing an inappropriate form of mortgage funding

 

Seeking professional help from mortgage advisers, quantity surveyors, and architects can provide valuable insights into cost control and project management.

 

Final Thoughts

A self build mortgage can provide a tailored solution for individuals looking to construct their own home, allowing staged access to funds as the project progresses. Though the process is more complex than buying an existing home, it can offer long-term rewards in terms of potentially increased value and personalised living spaces. Understanding the requirements, types, and potential hurdles of a self build mortgage is crucial in ensuring the success of your building project.

 

By planning carefully, budgeting thoroughly, and working with professionals where needed, you can help to make your self build journey as manageable as possible.