Most people purchase regular homes with the help of a mortgage — it’s exactly the same for self-builders. However, a key difference is that most of the big high street mortgage providers won’t be able to help you with a mortgage for a self-build project.
This is because of the complexities involved in a self-build mortgage
. For instance, you tend to need to borrow money in two phases. The first phase finances the initial land purchase, and the second allows you to borrow the money to actually construct the house on that land.
The second phase of most self-build mortgages tends to be released in stages — money is released for laying foundations, then once the roof is on you may have a further release of capital, and so on. With all of this in mind, it’s easy to see that the level of administration, intervention and sheer knowledge required to deliver a self-build mortgage is enough to put high street lenders off.
These factors mean it simply isn’t worth high street banks and building societies setting up the systems to handle self-build mortgages, considering the relatively low numbers of people self-building in the UK.
Luckily, however, there are many lenders who do issue this type of mortgage. It’s likely that these self-build mortgage providers are smaller than the lenders you might go to for a standard mortgage, and traditionally it’s a building society rather than a regular bank that will lend for this type of project. Typically, these organisations are willing to lend between 75 and 90 per cent of the purchase price of the land, and 75 to 90 per cent of the projected build cost.
There are caveats, however. The plot will need to have planning permission, and you’ll need a proper projected cost breakdown for the build cost tranche. All of this will be subject to the usual valuations that you would expect in the process of getting any mortgage.
As previously mentioned, some building societies release their build cost finance in stages once you have completed the initial land purchase stage. This may lead to cash flow problems, particularly for those working with timber frame suppliers who require upfront payment.
Some specialist self-build mortgage brokers, however, will allow you to access “advance” funding, which releases stage payments before the work commences. This makes things much easier for those looking to build quickly or to build much of the structure at once. One example of a mortgage broker that will allow for such an arrangement is BuildStore
An important point to note for prospective self-builders is that interest rates for self-build mortgages tend to be one to three percentage points higher than you might expect of a high street mortgage for a standard residential property. However, almost all self-builders tend to remortgage with a regular high street mortgage once the project has been completed, so the impact is usually negligible.