Who doesn’t have a vivid picture of their dream home in mind? It’s your dream and yours alone. So, you’ll want to maintain complete control over the building work and make it all a self-build project.
Although it’s a self-build project, that doesn’t mean it’s likely to come any the cheaper. Love Property magazine, for instance, revealed that the average cost of a self-built property – including the land, fees and building costs – is close to half a million pounds.
Your £500,000 or so investment is likely to be a sound decision, of course. But that doesn’t much help to find the half-million pounds in the first place – even if you have sold your existing home to build your dream home.
The solution may lie in a specialist self-build mortgage.
What is a self-build mortgage?
Just as the name suggests, a self-build mortgage is specifically designed to provide the finance you need for the building work on the dream home you have set your sights on.
A self- or own-build mortgage is a specialist mortgage that differs in important ways from a conventional mortgage. Those differences are described in a guide published by Homebuilding & Renovating – the main one being that the mortgage funds are released in key stages as the building project progresses, rather than in one upfront lump sum as in a standard mortgage.
Whereas the transaction funded by a standard mortgage calls for the whole of the advance in a single sum, your self-build project is better served by receiving the mortgage loan in instalments. That way, some of the ups and downs and unpredictable time-scales of such a building project become less of a risk for both you and the mortgage lender.
Your carefully planned budget can be thrown into confusion, for instance, if materials and supplies end up costing more than you reckoned, specialist jobs to be done by electricians or plumbers cost more than originally budgeted, or builders simply fall down on parts of the job, and the work needs to be done again.
How does a self-build mortgage work?
A self-build mortgage is an advance designed to cover all the costs involved in building your dream home – from buying the land, paying an architect to draw up the plans, buying the supplies and materials, and paying your builders and contractors for the work they do.
As already mentioned, though, a self-build mortgage is different in that the advance is released to you in instalments:
- the first instalment may be advanced to allow you to buy the land, for example – which is also your first opportunity to enjoy some of the cost savings in a self-build. You only pay stamp duty on the purchase of the land – and if it cost less than the threshold of £125,000, you pay no tax at all;
- a further instalment is likely to be paid over once the foundations have been laid;
- more instalments follow as the building project progresses and the roof is added;
- penultimate payments may be made when the roof is sealed, and the inside walls have been plastered; and
- the final 10% of your self-build mortgage is typically delayed until the building project is finished and you have been issued a completion certificate, awarded by the local authority within eight weeks of completion.
You need to pay particular attention to the fact that your mortgage lender will only release instalments when agreed phases of the building project have been completed – partly to ensure that the money advanced is only for building your house. If you go over budget, that is your responsibility since the lender is unlikely to advance any further instalments until completion of the one in hand – whatever the eventual cost.
Can you get a self-build mortgage as a first-time buyer?
In terms of eligibility and qualification, self-build mortgages are treated in much the same way as any other mortgage application – including those from first-time buyers.
The size of your deposit is clearly critical – it helps the lender to determine the loan to value (LTV) ratio of the mortgage – as is your ability to meet the lender’s affordability criteria and stress tests.
Who offers self-build mortgages?
Although self-build mortgages are offered by a reasonably wide range of lenders, the pool is probably smaller than you would otherwise find.
To ensure that you maintain as wide a choice as possible, and can identify the most competitive offers, therefore, you might want to consult a reputable mortgage broker.
What are the rates like on self-build mortgages?
Your mortgage broker is also likely to advise upon the prevailing interest rates you might expect of a self-build mortgage.
These rates are likely to be higher than those for a standard mortgage – since the lender is likely to consider self-build a higher risk. Nevertheless, the actual rate you are offered, of course, depends on a range of factors, not least of which is the size of the deposit you offer (a minimum of 15% is suggested in an article in Build It magazine on the 29th of July 2020).
How much can I borrow with a self-build mortgage?
As with any mortgage application, the maximum amount you may borrow for a self-build mortgage depends entirely on your individual financial circumstances – principally, your income, the deposit you have to offer, your ongoing expenses, existing borrowing and credit, and creditworthiness.
The lender’s calculation on the affordability of any mortgage is also influenced by the loan to value (LTV) ratio they are prepared to offer. By way of illustration, the Halifax Building Society is prepared to consider advances equivalent to an LTV of 75%. In other words, you would need to find at least 25% of the cost of buying the land, and to cover the cost of materials, and the payment of builders and contractors.
What are the benefits of a self-build mortgage?
A self-build mortgage allows you to build your dream home. A one-off. A unique home that you have designed and built yourself.
The self-build mortgage lets you do that – and one of the (potentially huge) benefits of self-build is that your liability for stamp duty is likely to be limited to the purchase of the land alone. And stamp duty on the purchase of the land only begins to kick in above the threshold of £125,000.
The other benefit is that your home is likely to be worth a lot more when it’s finished than what you’ve spent on building it and buying the land.
Although a reasonable number of leading banks and building societies offer self-build mortgages, they may be fewer and further between than standard mortgages. Lenders might consider them higher risk and you may, therefore, have to pay a slightly higher rate of interest.
To ensure that you identify the most favourable and competitively priced self-build mortgage deals on the market, therefore, you might want to consult a specialist mortgage broker.