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Self-Build Mortgage Guide

People decide to build their own home for a number of different reasons. For instance, they may have their dream home design in mind and know how to achieve it. Or, some people may wish to live in a certain way (i.e. in an environmentally friendly home, powered by renewable energy sources) or they may love a certain area, but can’t find the right type of existing housing they want.

Whatever your reasons for wanting to build your own home, this guide will take you through the self-build mortgage process.

What is a Self-Build Mortgage?

A Self-Build mortgage is a specialist mortgage type, which is not commonly found amongst high street banks and lenders. These mortgages differ from other types (see our Guide to Mortgage Types for more information). The funds from this kind of mortgage is released as staged payments, throughout the building process.

Every house building project will follow roughly the same stages of development. These will include;

• Stage One – Buying the plot (typically 50-85% of ASPM funds released)
• Stage Two – Laying the foundations
• Stage Three -Timber frames and wall plates
• Stage Four – Making the house water-tight and wind-tight
• Stage Five – Plastering and First Fix
• Stage Six-  Second Fix and Completion

However, not all self-build mortgages work in the same way. Traditionally, more lenders offer arrears staged payments (ASPM), whilst other providers can offer advanced payments for your project (AKA Guaranteed Advance Stage Payment Mortgage, GASPM).

In an arrears arrangement, a valuator must inspect the site at the end of each stage, before the money can be released to pay for the work that was carried out. In an advance staged mortgage, on the other hand, the funds come before each stage is complete. For this, you will need your lead times on materials and labour meticulously planned, to avoid pitfalls such as having to wait 10 weeks for glazing, before you can make your build water and wind-proof.

Am I Eligible for a Self-Build Mortgage?

• You will likely need at least 35% deposit to secure a self-build mortgage, but obviously, the more savings you have, the better. There is a lot that can go wrong in a self-build project, and urgent funds may be required to rectify any problems. Further, you will need to cover the costs of taking out a mortgage.

See more information about these costs in our Guide to Applying for your First Mortgage.

• You will need planning permission documentation, as well as building regulations approval.
• You will need to provide details of who the contractors are and the work they will be doing in your project.
• Cashflow projections and detailed building/materials costs. This is to ensure that you are mortgaging for the correct funds required.
• An approved warranty NHBC certificate (or equivalent), so that inspections can take place, with proper safety precautions maintained for all workers on-site.
• You will also need proof of income, outgoings, bills, and the like, as you would need for any other type of mortgage application.

Let’s Look at a Self-Build Mortgage Example

Steve and Louise want to design and build their own home. The couple seek a self-build mortgage for £320,000 and are successful, in part due to their previous renovation works on other homes and Steve’s carpentry and joinery experience. With the sales proceeds from their previous home, they have gathered £75,000 to part-fund the project. They received their funds in Arrears Staged Payments, outlined as below;

• £150,000 funds released for the purchase of the plot
• £33,000 for the cost of laying foundations
• £31,000 for construction of the wall plate level and timber frames
• £21,000 to make the building wind and water-tight
• £15,000 for the first fix and plastering
• £45,000 for the second fix and completion

Additional costs for set up (some of which was paid from the couple’s own funds) include;

• Architect Fees -£3,000  
• Survey and planning application fees -£5,000
• project management charges - £25,000
• Buildings warranty insurance -£2,000
• Emergency back-up fund saved -£38,000. 

How is a Self-Build Mortgage Repaid?

As the mortgage is drawn-down bit-by-bit, many lenders will accept interest-only repayments for a set period of the mortgage term (for example, the first 18 months). This is to incentivise borrowers, by allowing greater cashflow through the expensive early stages of the build.

Please note: As more of the mortgage loan is drawn-down at each stage, expect your mortgage repayments to get higher, as your project reaches completion.

After the house is built, the borrower may wish to remortgage to a standard variable, fixed rate etc.

What are the Benefits of a Self-Build Mortgage?

• Dream Home for Less – The cost of building your own home could run between £100,000- £300,000. For those who live in expensive areas of the country, you may notice that a three-bedroom home, for instance, could cost significantly more than this. If you have the right connections, or can do some of the work yourself, then potentially you could build a custom home for a lot less than your area’s market-value equivalent properties.
• No Need to Move – Unless developing properties is your gig, a self-build project could set you up in a house for life. It is unlikely, once you have lovingly built your own house, that you will want to pack up and move in a few years’ time.
• Claim the VAT Back – This can only be done once (at the end of the project), so do make sure you retain all receipts, as you can claim the VAT back.
• Expert Help at Hand – If the idea appeals, but you know you don’t have the specialist trade knowledge to get started, expert help is available. You may want to hire a package company that can offer design, build and project management, to ensure that you do not make any catastrophic decisions that put your whole house build project into jeopardy.
• Remortgage for Less- As self-build mortgages are highly risky, typically the rates on interest may be higher than with other types of mortgage. However, once the project is complete, you may be able to remortgage with a more competitively priced lender.

What are the Pitfalls of a Self-Build Mortgage?

• Savings Needed – For a self-build mortgage to run as smoothly as possible, it is likely that you will need savings as a safety net. Arrears self-build mortgages especially can face delays and some jobs simply cannot be put on-hold.
• Funding Problems – At each stage of a ASPM, the valuator may come and look at the work and value it at less than the cost of installation. These funding gaps could potentially be disastrous if there are unforeseen problems (like poor soil conditions for foundations). Therefore, it is highly recommended that self-builder has back-up funds.
• Cost of Insurance – Your mortgage provider may ask you to pay for single indemnity insurance, for each stage of the project, so that they are lessening their risk in lending to you. This could potentially be a rather expensive hidden cost in your home build project.
• 90% LTV Mortgages – This again comes down to funding for the self-build. Typically, you will need at least a 35% deposit to get the project moving and the mortgage secured. Although there are products which offer 90% LTV Self-Build Mortgages.
• You Need to Be On-Hand – Managing a self-build project is a massive undertaking. Every day you may be required to give permission on a job- even if you hire a project manager. You may have to live on-site (or very close to site). If you work full-time, you will more than likely need your phone on you always. Hiring a team of builders and project managers is just the start of your personal involvement in the project, so you must have a passion and interest in what you are achieving with the build.
• Careful Planning – You will need excellent planning skills to pull off a project like this. When approaching lenders especially, you need each stage meticulously planned before your self-build mortgage can be agreed.
• Alternative Accommodation – You will need to factor in the cost of renting somewhere nearby, or even renting a static caravan, so you can live on-site whilst the work is carried out. This money will make up part of your contingency fund for the entire project. Also, don’t forget you may also need to pay for storage space for your belongings, whilst the work is undertaken.

 What are the Alternatives to Self-Build Mortgages?

If you would like to build your own home, you will more than likely need to secure a mortgage, unless you have a huge bank of savings from the sale of previous properties to play with.  

To secure extra funding for your contingency fund however, you can look at alternatives to mortgages, such as;

Unsecured Loans – These will charge higher rates of interest than typical mortgage products, however these could help you plug an emergency gap in funding.

Further, if you are looking for a specific style of home, you can look at pre-fabricated homes, where the design and build is carried out by a specialist company. This can make choosing a design quick and easy. This method may also see your project completed in less time than a conventional self-build project, and the materials and design could also work out cheaper.

If you would like free financial advice and quotes for self-build mortgage options, get in touch.