Finance

Self Build Mortgages - Financing a Self Build

Self build mortgages

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Best strategies for financing your self build home

There’s no one-size-fits-all solution when it comes to funding a self build. With a number of borrowing options available, the right one for you depends on your individual financial circumstances and project requirements. The most successful self-build projects are those that have been planned well from the start. That means knowing your budget and understanding your borrowing options early on.

Typically, people who opt to self-build their home tend to save on the full cost of the project, compared to the cost of buying a similar house on the open market. Of course, most self-builders do not want developer style homes, but it’s a useful comparison. Giving you an idea of how much you could save by building your own house. However, the equity generated by your self-build will depend on many factors, including route to build, maximising end values, ceiling values in the area and the quality and efficiency of the build.

Regardless of the savings you could eventually make, building your own home is still a significant investment. It can be financed through a range of options depending on your personal circumstances. Including self-build mortgages to re-arranging private finances through pensions and re-mortgaging etc. Here, we look at a few strategies for financing your self-build project.

How do self build mortgages work?

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 to build a self-build home.

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 finances the construction of the house.

The second phase of most self build mortgages usually has several stages, and depends on the individual lenders terms and conditions. Money could be released for laying foundations, then once the roof is on you may have a further release of capital, and so on. 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, particularly given that relatively few people choosing to self-build in the UK.

Luckily, there are many other lenders who do offer 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. 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 up to 85% of the purchase price of the land and the projected building costs, however this will all depend upon your financial circumstances. 

If you are looking to take out a self build mortgage there are a number of caveats you will need to consider. 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 if you have some large payments to make in the early stages of the development process.

Some specialist self build mortgage brokers 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 the bulk of the structure at once.

A key point to note is that interest rates for self build mortgages tend to be higher than you might expect of a regular mortgage for a standard residential property. However, almost all self-builders tend to re-mortgage with a normal mortgage once the project has been completed, so the impact can be time limited and usually negligible compared to the interest you would pay over the whole term of the mortgage.

Can I get a mortgage for a timber frame home?

Yes! There is a common misconception that it’s difficult to mortgage a timber frame or SIPS build system, but this simply isn’t true. They are actually considered to be a standard construction method by self build lenders. The Accelerator mortgage (created by and exclusive to BuildStore) releases funds in advance of each build stage. This is ideal for timber frame projects, as you usually need to pay for your frame before it’s delivered and erected onsite.

Lending criteria can be restrictive when it comes to the material used for the outer skin of your build, as this is what protects it from the elements and determines the durability of the build. It’s a sensible idea to speak with a professional mortgage adviser before deciding on your construction method, to make sure that what you want is mortgageable and won’t come with unexpected restrictions.

How does a stage payment mortgage work?

A stage payment mortgage differs from a standard house purchase mortgage because the money is released in stages as the build progresses, rather than as a single amount. At each stage of your project (as the value of the build increases) a percentage of your overall funds will be released. There are two types of stage payment mortgages and they are defined by when funds are released during the build. This is either in arrears or advance and they are tailored to suit both your income, affordability and the stages of your build.

Arrears or advance stage payments?

The type of stage payment mortgage best suited to you will depend entirely on your individual circumstances, project and cashflow requirements. It pays to speak to an expert mortgage adviser who can assess your situation to determine which type is right for you.

Your payment stage releases should reflect your costs and the payment terms of your trades people and suppliers. Remember, your payments may need to be made monthly, weekly or even daily and it’s important you have the funds available when you need them to pay your bills.

Arrears stage payments

With a traditional arrears mortgage, funds are released to purchase the plot, with the remainder released at each stage of your project once it’s completed and a valuer has visited the site.

This option could suit, if you have sufficient savings to fund the deposit on the land and for the early stages of construction. For example, if you already own your plot of land and can re-mortgage it to provide funds to start the build. Or, if you’ve already sold your existing house and have cash available to buy the land and start the build.

Advance stage payments

An advance stage payment mortgage is ideal if you’re using a timber frame and have to cover the cost upfront. The accelerator mortgage from BuildStore releases funds in advance of each build stage, rather than in arrears. This means you have the cash you need to fund the early stages of your build, including the plot purchase. This type of mortgage can also have higher borrowing percentages, meaning you could receive as much as 95% of your plot and build costs. This option could work if:

  • You only have a small amount of cash available and don’t want to sell your existing house to release equity
  • You want to keep your cash until later in your project to maintain a good contingency fund

Should I use a mortgage adviser to arrange my finance?

The short answer is yes. When it comes to funding your self build, there are many factors and borrowing options to consider. It pays to speak to an expert mortgage adviser who can look at your financial circumstances and project requirements. They will then recommend and tailor a borrowing solution to suit you and your new home.

Are you able to remortgage your existing home to pay for a self build construction?

There are two factors that lenders consider above all others when deciding whether your existing home can be remortgaged. First, you must have enough equity in your property. Second, the lender must believe that you are able to service a new mortgage. Meaning, is your income sufficient, and can you continue making repayments all the way through to the end of the contract. If you are able to satisfy these two criteria, re-mortgaging your existing house is a comfortable and straightforward way to raise the money to build your new home.

This won’t apply to everybody’s situation but if you are able to release equity, it means you don’t have to sell your home first in order to free up capital to get started. Speak to your existing lender about your unique circumstances. As this can be an easier way to get started on a self build project you’ve been considering, but haven’t yet worked out the financial implications.

Are you able to obtain short-term lending or funding from anywhere?

Many developers use short-term funding to finance the purchase of run-down houses and plots. This is particularly the case with auctions, where the 28-day hammer-to-completion timescale usually beats the regular lenders. There are ways of using such short-term funding to get your self build house up and running. If you are looking to purchase land and then re-evaluate, this may be the logical route to take. It all depends on the circumstance. If the perfect plot appears out of nowhere, it’s good to have options.

Specialist auction finance companies operate bridging loans, which are purposely designed to fill the gap between purchase and the ability to convert to a mainstream mortgage. These are designed to be short-term loans and with good reason. Typical interest charges are much more expensive than a self build or residential mortgage and the lending criteria is usually more liberal. If you’re considering this kind of funding stream, be sure to shop around very carefully and always seek professional mortgage advice.

Can you privately fund your project?

You may already have the funds to purchase a plot and build your own home, perhaps through inheritance or savings. You might actually be in this position without realising it. Could you sell off part of your garden as a building plot to raise cash in the short-term, for example?

Self-builders come to all sorts of different arrangements to finance their projects. With the relaxation of pension rules, you are now able to draw down your pension fund at 55 years old, which is rising to age 57 in 2028. In theory, there’s no reason you couldn’t use this to fund the construction of an energy efficient, cheap-to-run home for your retirement.  As with all big decisions like this, it is best to take independent financial advice from someone who understands your individual financial circumstances. Detailed research pays off, and having someone on your side who knows the pitfalls to any funding stream always proves to be invaluable.

What are the hidden costs of building your own home?

As any self-builder will tell you, you need to bring a fair amount of cash into the project. Even if it is primarily funded through a self-build mortgage. There are a number of 'hidden' costs that vary with each project but can typically include costs that either need financing before lending is secured or are not mortgageable. Here are four costs that you might not expect to pay or that you may not know the cost of when setting out on your first self build.

Design fees

If you decide to use a professional designer to create your dream home, always get a quote and a detailed description of what is included for the cost. Prices may vary due to a wide range of services and the complexity offered.

At Potton, we don’t charge significant upfront fees for using our in-house designers but do tend to require some early, up-front commitment.

Planning and regulatory fees

Your planning application might need to include surveys. This is the case if you have special ecological conditions on the site, for instance, these can typically cost in the region of £500 to £2,000 per survey.

Additionally, submitting the planning application itself involves a fee. This can vary between local authorities and private approved inspectors. To get an estimate of the planning fees in your area it is a good idea to contact your local planning office who will be able to advise the cost to submit your self build application.

Insurances

Insuring the project against everything from theft of materials to public liability is critically important given the scale of your investment. Typically, this costs around 1% of the total project and will depend on the insurance policy features and actual quotation of the build. Lenders will also require you to have a structural warranty on the finished build, in addition to meeting building regulations. This could be in the region of 1% of the total project cost, which is subject to your project quotation.

Deposits

Finally, don’t forget the cost of your deposit. Mortgages often only cover up to 85% of the land and 85% of the build costs, depending on affordability. Although this percentage can vary slightly, you will need to cover some of the costs upfront from your own pocket. You’ll need to find this remaining 15% or so from savings or equity in your existing house.

Do I need to sell my existing house before my self build is complete?

This depends on how you fund your build and how much cash you have in savings. If you choose an arrears stage payment mortgage, you’ll need a minimum deposit of 15% of the plot price, as well as money to pay for the early stages of the build. If you don’t have sufficient savings, you may decide to sell your current house to release the equity before starting your new project.

If you don’t want to sell your current house and move into temporary accommodation before your new build is complete, the BuildStore accelerator mortgage may be right for you. The higher lending percentages and advance stage payments during your build will ensure that cashflow is not an issue. So you can continue living in your current house until you’re ready to move.

Help to Build government scheme

As of 27th June, 2022 you may be eligible to apply for a self build mortgage through the government Help to Build scheme. It is designed to give people the chance to create their own home even with a small deposit. It is also aimed at those with specific living requirements, for example if you have a disability, live with a large family or care for elderly relatives. This is a great opportunity for more people to have the chance of self-building. Find out more about the Help to Build scheme.

Please note the content in this article is for your general information and use, and is not intended as financial advice. We always recommend consulting a qualified and registered professional when seeking financial advice.