How Does A Self-Build Mortgage Work?

You’ve always dreamed of building your perfect home, but you don’t have the cash to do it. Is it possible to mortgage a property, when the property doesn’t yet exist? You bet. Here’s what you need to know about a self build mortgage.

 

Why is a self-build mortgage different to a house purchase mortgage?

When you take out a mortgage to buy a property, the lender usually releases a lump sum that covers the cost of the purchase. With a self-build mortgage, the lender releases funds in stages, aligned with the progress of the build.

 

Do I need a deposit?

Much like purchasing an existing property with a residential mortgage, you will need a deposit. Generally, lenders ask for a minimum of 25%, but most ask for more, and this could be as high as 50%. You will also find that interest rates are generally higher on self-build mortgages than on regular mortgages, but like a regular mortgage you will usually be eligible for more favourable interest rates if you can provide a higher deposit.

 

When is the money paid out by the lender?

The stages at which funds are paid can vary between lenders, but are usually as follows:

• Purchasing the land
• Initial project costs and laying foundations
• Construction to wall plate levels
• Building made wind and watertight
• First fix and plastering
• Second fix through to completion

With most lenders, the money for each stage is released after the stage is complete and the lender has sent a valuer to the site. There are some lenders who will release funds in advance of the building stage, which should be a consideration if you don’t have the cash to support paying builders and materials.

 

Why would I consider a self-build project?

Aside from having the freedom to build a house that suits you and reflects your own character, there can be financial advantages to building your own home.

 

It’s not uncommon for the completed property to have a higher value than it cost to construct. You could also save money on stamp duty; there is no existing building to pay stamp duty on (it’s not applicable to the cost of the building work or on the value of the property after the build is complete) and so stamp duty land tax will only apply to the cost of the plot of land.

 

What else do I need?

Before the lender will agree to funding the purchase of the plot of land, you’ll need to have planning permission to ensure you are able to build.

As well as the cost of the mortgage, you’ll also need to ensure you have carefully estimated the costs of the build, including professionals’ fees (such as architects and building contractors), solicitor’s and surveyors fees, and insurance. You need this information to ensure the the funds released at each stage will be sufficient.

Building your own property can be both a challenging and rewarding project. To ensure the finance aspect of the build is one less thing to worry about, speak to a mortgage advisor to help you find the deal that is most appropriate for your circumstances and guide you through the mortgage process.

 

If you would like more information on self-build mortgages and to discuss your mortgage options, our expert mortgage advisor, Dee, can help. You can contact Dee onmortgage@lazenbysfs.co.uk