Posted May 11, 2021

An increasing number of people are turning to self-build in order to create their dream home, but it’s not quite the same process as buying a house. Building your own home is usually financed with a self-build mortgage, which differs to a standard residential mortgage.

If you’re interested in building your own home and kickstarting a self-build project, it’s important to understand how it all works and how to finance it.

What’s the difference between a self-build mortgage and a residential mortgage?

A residential mortgage will release funds all at once, giving the buyer access to the necessary finance to buy a property. With a self-build mortgage, the lender releases the money in instalments, in order to fund each stage of the construction as it progresses.

There are two types of self-build mortgage: advance and arrears. An advance self-build mortgage releases payments at the start of each stage, which can help if you need the funds for labour and material costs upfront. An arrears self-build mortgage releases payment as each stage is completed, which is suitable if you have your own cash injection to put into the project.

What are the advantages of a self-build mortgage?

Taking out a self-build mortgage has its benefits, as building work is exempt from stamp duty. You would only need to pay stamp duty on the land, if the cost exceeded £125,000. In some cases, you might find that the value of the finished property is higher than the cost of land, materials and labour put together.

However, it’s important to remember that there are only a number of lenders who will offer self-build mortgages. Using a mortgage broker, such as ourselves, can ensure you find the best deal to suit your needs and financial situation.

What to consider when taking out a self-build mortgage

You should carefully consider the possibility that self-build costs can end up being higher than the funds issues at that particular stage. It can be common for projects to overrun, no matter how organised you are. If you find yourself in this situation, a bridging loan could help to provide the short-term funding needed to raise capital.

When applying for a self-build mortgage, it can be helpful to show lenders that you have carefully planned your project and considered every stage. Think about factors such as cost projection, timeframes and contingency plans.

The amount you can borrow can depend on your financial circumstances, such as income and outgoings. Where you intend to live while you build your home can also have an impact on affordability, so consider any current rental or mortgage payments you will be making. When it comes to applying for a self-build mortgage, you will likely need a number of documents including planning permission, proof of Building Regulations approval, construction drawings, total cost estimate and site insurance.

If you’re ready to get started with a self-build mortgage or you’re looking for some advice before you go any further, get in touch today and see how we could help.