What is a self-build mortgage and can I get one?

If you’re planning to build your own home instead of buying one, you may want to consider a self-build mortgage instead of a conventional mortgage.

A self-build mortgage allows you to finance the construction of your home in stages, rather than receiving a lump sum like a conventional mortgage.

If you already own land and have planning permission, a self-build mortgage can help fund each phase of your project, releasing money as the build progresses.

We reveal everything you need to know about how to get a self-build mortgage, including how they work and how much you can borrow.

What is a self-build mortgage and how does it work?

Before you start your self-build project and choose your mortgage, it’s worth doing your research at the Self Build Portal.

Most types of mortgages are set up so that the buyer can access all the money in one go, in order to hand it over to buy the property.

A self-build mortgage works differently as the lender’s usual main security (a house that they can repossess if necessary) doesn’t exist yet. So, releasing all the money at once would expose a lender to a lot of risk.

With a self-build mortgage, the lender releases the money in instalments (typically five or six). These instalments are designed to fund each phase of construction, so the project is paid for in stages. This staggered approach helps ensure that the project remains on track financially.

With some self-build mortgages, the money is released in advance, so you’ll get the money to lay the foundations before you actually lay them.

However, some mortgage lenders release funds in arrears, so you’ll have to pay for each stage of the construction yourself and then claim the money back when the next instalment is paid out.

Self-build mortgages vary between lenders, so ensure you get one that suits your circumstances.

What are the different types of self-build mortgages?

There are two types of self-build mortgages, which are advance and arrears mortgages.

Advance self-build mortgage

Your lender releases payments at the beginning of each stage of the construction project, so you can use it to pay for materials and labour (and purchase the plot of land if you don’t own it already).

If you only have enough available money to cover your deposit, this loan will ensure you always have sufficient cashflow to keep the project moving.

The lender will usually keep 10% of the total loan amount until your property is awarded a completion certificate.

Arrears self-build mortgage

With this type of mortgage, the funds are released to you after the completion of each stage. So, you have to manage the costs of materials and labour until the lender is satisfied each stage is complete.

More lenders are willing to offer this kind of self-build mortgage, but you will need to have the cash to finance each stage while you wait for your mortgage payment.

If you don’t have any savings, you could use bridging loans to cover costs upfront and then repay these from the mortgage payments.

How much can I borrow with a self-build mortgage?

The amount you can borrow with a self-build mortgage depends on many factors, including the mortgage lender, your circumstances and whether you’ve purchased the land for your property.

You’ll also need to pass credit and affordability checks to qualify for a self-build mortgage.

If you own the land you plan to build your dream home on, you can usually borrow up to 75% of the expected property value.

If you don’t own the land, you may not be able to borrow as much, so it’s worth securing this first.

You should contact a mortgage broker before applying for a self-build mortgage as they can boost your chances of a successful application.

What are the advantages of a self-build mortgage?

Building your own home could potentially save you thousands, particularly if you already own land and have planning permission.

Building work is exempt from stamp duty, but you only have to pay duty on the value of the land if it exceeds £250,000, which is likely to be far lower than the value of the completed property.

You will often find that the cost of construction is lower than the amount you would have paid for an existing home.

What are the downsides of a self-build mortgage?

Only a limited number of lenders offer self-build mortgages, so you need to shop around to find the right deal. Interest rates are usually higher than traditional mortgages, so it can be more expensive.

Unbiased can quickly connect you with a qualified mortgage broker who can find the most competitive mortgage for you.

The overall cost of borrowing is likely to be higher due to the higher level of risk for the lender. It is also a requirement that advance funding is secured on a single premium insurance policy.

This kind of insurance involves you paying a lump sum upfront to reduce the lender’s risk further, and premiums can be high.

You will usually have to wait to receive 10% of your mortgage once the project is fully completed.

It’s also worth flagging that building your own home is time-consuming and takes longer than buying an existing property.

What happens if my self-build costs are higher than the funds issued in that stage of the mortgage?

Despite the best planning, self-build projects can overrun and cost more than initial estimates.

You should consider insurance to cover the costs of long delays or overspending, as well as theft, vandalism and damage caused by bad weather.

It’s also worth stressing you may also end up needing more money to finish a stage of your project.

Your self-build mortgage provider might agree to release more of your funds early, but this means there will be less money available for the rest of the project.

Alternatively, a bridging loan is a way to plug the gap and keep your build moving, but this can be expensive and you should seek advice beforehand.

Who can get a self-build mortgage?

Before you approach lenders, you will need to see if your project qualifies for a self-build mortgage.

The qualifying requirements differ between lenders, but most will specify whether the completed house can be used for residential or commercial purposes.

It is possible for first-time buyers (or, in this case, first-time builders) to get a self-build mortgage. Having a deposit of between 25% and 40%, a good credit history, and proof of reliable income is vital.

If you’re struggling with a deposit, the Help to Build scheme may help you reduce the amount of money you need upfront.

Lenders are more cautious with self-build projects, so a mortgage broker can be a real asset.

How to get a self-build mortgage

You will need to show lenders that you have planned your project carefully, and rigorously considered every stage, as well as get planning permission and buildings regulation approval.

You should put together detailed projections of costs and timeframes, along with risk assessments and contingency plans. Make sure you have a map of the site, floorplans and a rundown of how your budget will be spent.

Some lenders may insist you use conventional materials, as this helps facilitate the valuation once the project is complete.

You should also check the planning conditions to ensure you are fully permitted to build the kind of structure you want on the land.

Your lender will also likely want a structural warranty, or to have the project supervised by an architect or professional consultant.

Finally, you will need to show your lender you have enough money to live somewhere else while the work is being done. A low-cost option may be to live onsite in a caravan, or move in with relatives.

Self-build mortgages can be a great tool for helping you build your dream home at an affordable cost.

Using a specialist mortgage broker will make a difference when exploring niche lenders or products.

Can I use a traditional mortgage when my home is built?

Once your dream home is completed and certified by a surveyor, you can remortgage, which will likely come with a lower rate compared to your self-build mortgage.

You should watch out for any early repayment fees and consult a broker beforehand.

Get financial advice 

Securing a self-build mortgage involves understanding the unique payment structures and requirements that differ from traditional mortgages.

By choosing between advance and arrears mortgages and carefully managing costs throughout your project, you can effectively finance your dream home. 

Make sure to explore various lenders, consider potential insurance needs, and take advantage of schemes like Help to Build to enhance your chances of a successful build. With thorough planning and the right mortgage, you can turn your self-build vision into reality.

Unbiased will match you with a qualified mortgage broker who can help you navigate the complexities of self-build mortgages, ensuring you find the best financing options for your construction project.