Building your own property is the perfect way to create the home you’ve always dreamed of. Rather than buying an existing property, you can design your home from scratch to meet your exact specifications and ensure that it is built to meet them entirely. When using a mortgage to finance your building venture, a certain type is required that is expressly designed for self-build projects — a self-build mortgage.
As self-builds are becoming more popular, so too are self-build mortgages and many lenders offer loans for this purpose up to £1 million. When you need to secure a higher amount than this for your self-build project, private banks provide more flexibility regarding both your financial situation and your project requirements.
At Trinity Finance, we have formed good relationships with lenders offering self-build mortgages and can secure the best deal to suit your needs. Here, we’ll explain the types of self-build mortgages available, the funding stages, eligibility criteria, issues to consider and advantages that self-build mortgages provide.
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“This is the third time we have used Trinity Finance for our mortgage/remortgage. Alasdair is always friendly, helpful and goes above and beyond to make sure we get the best advice and deal that works for us. He explains everything clearly and efficiently, keeping us regularly up to date with the progress. Would highly recommend anyone to use Trinity Finance.”.
Alasdair Lowrey
Associate Director
FAQs
Do you need to pay stamp duty when you have a self-build mortgage?
No, stamp duty isn’t charged on building work or on the value of your property once you’ve finished building it. This is one of the advantages of building your own home and using a self-build mortgage. Without having to pay stamp duty, you stand to save thousands of pounds compared with buying an existing property. A stamp duty charge is only made on the land and, even then, only if its value exceeds £125,000.
How does a bridging loan compare with a self-build mortgage?
If you’re already a homeowner and either own it outright or have adequate equity in it, you may decide to opt for a bridging loan. This could either be to get started on your project while your self-build mortgage is being finalised or instead of a self-build mortgage altogether. This short-term loan – typically taken out for up to 12 months – is secured against your property and is quick to arrange. You can use the funds to buy the plot of land, cover the build costs or pay for both. When your new home has been built, you can then sell your original one and repay the bridging loan as your exit strategy.
Bridging loans tend to be more expensive than other forms of lending, though. This is because of their flexibility and convenience. Bear in mind that things can often go wrong with building projects. This means that if you come up against any issues and your project is delayed, you could incur additional costs, which may become expensive. As your original home is used as security, you’ll also be putting that at risk.
Do you need to have a warranty and insurance in place to be approved for a self-build mortgage?
Yes, lenders usually expect you to have site insurance in place as well as a structural warranty. These generally need to be arranged before the lender will release any funds to you. These policies provide essential protection should something go wrong with your self-build project.
Do you need planning permission before you start building your home?
Yes, your lender will require a copy of the planning permission. This can be either outline planning permission, which is adequate for the plot of land, or full planning permission.
Do you have to sell your current home while building a new one?
Not necessarily. If you have adequate funds, such as savings, to pay for your deposit, cover the initial build costs if receiving your self-build mortgage funds in arrears and continue making your mortgage payments while your new home is being built, then there’s no need to sell your home and stay in alternative accommodation. Also, if you own your home outright or have equity in it, you may decide to remortgage or obtain a bridging loan as an alternative to a self-build mortgage.
What is a self-build mortgage?
As you need funds to build your home, a standard residential mortgage just isn’t suitable. That’s because the funds from a standard residential mortgage are released when you complete the purchase of your property. With a self-build mortgage, however, the funds are released at various stages throughout your building project.
Depending on the lender and the arrangement you agree to, you may receive the funds at the beginning or end of each construction stage. Receiving the funds at the start of every construction stage ensures that you have the means to pay for materials and labour costs as needed. However, the lender may prefer to release the funds to you after each construction stage is finished. With this option, it’s necessary to have adequate funding to hand, such as access to savings, so that you can undertake the construction work needed for the next stage. You can then claim back the money you’ve spent when the next instalment of mortgage funds is released by the lender.
The types of self-build mortgages available
As mentioned above, lenders vary as to when they release the funds to you. This gives you two types of self-build mortgages to choose from — advance and arrears.
Advance
For this option, the lender releases the funds at the start of each construction stage. This provides you with the necessary money to pay for labour costs and materials as they arise. Receiving the funds in advance is more advantageous than being funded in arrears if you don’t have access to other funds, such as being able to release equity from another property or having substantial savings. It also removes the need for taking out short-term funding, such as a bridging loan, and improves your cash flow. Fewer lenders agree to advance funding than funding in arrears and many retain a percentage of your loan amount until you receive the completion certificate for your property.
Arrears
With arrears funding, you receive the funds at the end of every construction stage. Before agreeing to this type of self-build mortgage, you need to ensure that you have the finances in place to cover all of the necessary building costs until the next mortgage payment is released. A property valuer usually visits the site at the end of each stage to confirm that it has been completed. At this point, the lender will release the funds and you can recoup your costs. This is the most common type of self-build mortgage and is generally offered with more competitive rates than advance mortgages.
The funding stages for a self-build mortgage
Releasing the funds in stages minimises the risk for the lender. It ensures that you have enough money for each stage of construction and won’t run out of funds before your building project has been completed. Some lenders are willing to provide funds to buy the plot of land whereas others are only prepared to fund the construction aspect of your project. These are the typical stages for funds to be released:
- Purchasing a plot of land, depending on the lender
- Completing the foundations
- Erecting the walls
- Ensuring the property is wind and watertight
- Carrying out plumbing and electrical works as well as the plastering
- Implementing the final fixes to complete the project
Using a self-build mortgage to buy land
Before you can build your property, you need a plot of land to build it on. Some self-build mortgage lenders provide funds for you to purchase this with. You need to ensure that outline planning permission is in place first. This confirms that consent in principle has been given by the local authority to proceed with the relevant building and development plans. A planning consultant can check whether this planning permission is already in place for the plot of land that you wish to purchase. If not, they can make an application to the local authority on your behalf unless you’d prefer to do this yourself.
Using a self-build mortgage for renovations and conversions
Some lenders allow self-build mortgages to be used for renovation works or property conversions. This is ideal if you want to carry out extensive renovation or conversion works on your existing home and these require more funding than you can obtain via a remortgage.
Your eligibility for a self-build mortgage
You don’t need to be a builder or have any knowledge of the processes involved with house-building to benefit from a self-build mortgage. Instead, you can employ the services of an architect, a surveyor and a team of builders to carry out the project on your behalf. You may also prefer to hire a site manager to oversee the project. If you’re a first-time buyer, you can apply for a self-build mortgage as long as you meet the relevant lending criteria.
The purpose of a self-build mortgage is only to fund the construction of a property that you intend to use as your home. In order to finance the building of a property that you wish to sell for profit upon completion, you need to apply for development finance instead.
We can match you with the right self-build mortgage lender
It’s crucial that your building project satisfies the lender’s criteria. As each lender is different, it’s recommended to check the stipulations with one of our qualified mortgage brokers before applying for your loan. Located throughout Kent, London and Edinburgh, our mortgage specialists know the varying criteria between the lenders offering self-build mortgages and can ensure that your building project meets the necessary specifications. Give us a call on 01322 907 000 to run through the eligibility details. Alternatively, get in touch with us by email at info@trinityfinance.co.uk or via our contact form. One of our self-build mortgage brokers will reply to you with more information as quickly as possible.
How much can you borrow with a self-build mortgage?
As with any mortgage, you need to satisfy the lender’s affordability checks. The amount you can borrow is calculated on your income and expenditure, taking your credit rating and any outstanding debts into account as well. Generally, lenders are prepared to offer self-build mortgages with a 75% loan-to-value (LTV) ratio. This means that you need to pay a deposit of 25% of the building project’s value.
Specialist lenders and private banks offer more flexibility with their lending criteria. You may be able to secure a higher LTV and benefit from affordability calculations based on your overall wealth. This can include a unique income structure, such as bonuses and commissions, as well as your assets. If you don’t have a deposit, some lenders offer 100% LTV self-build mortgages but you need to provide some form of security. This is usually the plot of land that you are expected to already own.
Applying for a self-build mortgage
The lender will request detailed information about your building project, including cost projections, schedules, a risk assessment and a contingency plan. You also need to provide:
- Proof of the planning permission
- Drawings and specifications concerning the construction works
- The building regulations approval
- A structural warranty and the site insurance
- Details of the architect’s professional indemnity cover
As well as this information, you need to show the lender that you can afford to live elsewhere, such as in rented accommodation, while your building project is in progress.
The costs involved for a self-build mortgage
The costs involved for your self-build project will vary depending on the site preparation needed, the type of construction, where your new home is to be located, the size of your home as well as its internal and external design specifications. But you also need to factor in the interest rates and fees when considering the costs.
Interest rates
Self-build mortgages tend to have higher interest rates than standard residential mortgages as there’s more risk involved for lenders. Having said that, some lenders offer special deals for self-build mortgages. For example, you may be offered an interest-only option while the building works are being carried out. This keeps your outgoings lower throughout the project, which improves your cash flow. Other lenders allow you to switch to a lower interest rate without paying penalty fees when your property reaches a habitable condition. As mentioned earlier, lenders usually offer more competitive rates for arrears self-build mortgages.
Fees
There are various fees to consider too when embarking on a self-build project. These include:
- Planning application fees
- Your lender’s fees
- Survey fees
- Legal costs
- The architect’s fees
- Building regulation fees
- Insurance costs
Issues to consider
The construction method
Some lenders stipulate the type of construction materials you can use, such as masonry or timber frame. Restrictions are more likely to apply to the outer skin of the building, with the material not only needing to be aesthetically pleasing but durable and long-lasting. The lender needs to ensure that the property retains its value or preferably increases in value throughout your mortgage term and can be sold if need be. For example, timber cladding has a short life expectancy compared with masonry so some lenders won’t agree to it at all. Others will restrict how much timber is used while some lenders won’t have any issues with the use of timber.
A contingency fund
Unexpected issues can always crop up during a building project and you may experience these despite your best efforts during the planning stage. The work may cost more than you estimated, for example, or you may be faced with unavoidable delays.
As an example, you may need more funding than you thought necessary for a particular construction stage. In this case, you may decide to approach the lender to request an earlier release of some funds but this will leave you with less money for the outstanding construction stages. Alternatively, you can use a bridging loan to cover the costs. If you know you’re going to run out of money for your project, you can approach the lender for a top-up on the mortgage. This involves a further mortgage application plus all of the related paperwork. It can be expensive and time-consuming, not to mention that your building project will have to stop if you run out of funds.
To avoid these complications, we recommend that you have a contingency fund in place. If you can allow for about 15% of the project costs as your contingency fund, this helps you to deal with any unforeseen circumstances that may otherwise stop your project from continuing.
Can you benefit from a better deal when the building work is finished?
Once your project has been completed, your building is habitable and a new valuation has been carried out, you can switch to a new mortgage product. Many lenders offer the opportunity to change to a deal with a lower rate when the building works have been completed. Your original deal may also be on an interest-only basis during the build on the understanding that it can be changed to a repayment mortgage once the building is habitable. If better rates are available elsewhere, you may prefer to remortgage via a different lender. Just be aware of any early repayment charges you may be liable for if you choose this option.
Why use a self-build mortgage broker?
Self-build mortgages are a niche type of mortgage and, as such, can be hard to find. They’re also complex to arrange and the process can be lengthy. Site, construction and design issues have to be taken into account as well as your experience and affordability for the project and the lender’s requirements.
Our self-build mortgage brokers have specialist, in-depth knowledge of this type of finance. They can fully assess your situation and project requirements before preparing your self-build mortgage application. They can advise you on all of the paperwork that’s needed before your application is prepared, discuss your credit status with you and go through your project finances in detail. Our self-build brokers can ensure that the right planning permission is in place before your application is submitted to a lender, whether that’s outline or full planning permission. They can help you with any potential obstacles, such as wanting to build a home with a non-standard construction or being self-employed. They can also ensure that you’re fully aware of the lender’s terms relating to every stage of this complex mortgage.
With access to an unrestricted range of first and second charge lenders, they know which lenders to approach on your behalf for this niche mortgage type. They also have access to broker-only self-build mortgage deals, which you wouldn’t benefit from if you approached lenders yourself. Having tailored your application for the best chances of success, our specialist mortgage brokers will find the optimum deal for you, taking the funding arrangement, interest rate and fees into account. With the help of our self-build mortgage brokers, you’ll save valuable time, have access to exclusive deals, increase your chances of a successful application and benefit from a less stressful experience than if you tried to arrange this type of mortgage by yourself.
The advantages of a self-build mortgage
There are many benefits to building your own property, as we’ll detail below.
Your own design and specifications
First and foremost, you can design the property exactly how you want so that you can look forward to living in your dream home. When you buy an existing property, there will always be some aspect that doesn’t entirely meet your needs or taste. With a self-build project, every part of the internal and external design will reflect your preferences.
The funding stages ensure that your project stays on track
A self-build mortgage provides you with funds in stages to build your home. This helps you to keep on track with the construction. It’s an ideal type of funding if you don’t have access to an alternative, such as savings or the option to release equity.
Cheaper than buying an existing property
The cost of building your bespoke home should be significantly cheaper than the cost of buying a similar property that already exists. Upon completion, your property’s value should be notably higher than the sum you have paid for the plot of land, labour costs and materials.
Stamp duty savings
With a self-build project, you can also make huge savings on stamp duty as building work is not subject to this charge. As well as that, you’re not liable for stamp duty on the value of your finished property. This charge is only made on the land’s value if it exceeds £125,000.
The disadvantages of a self-build mortgage
There are various disadvantages to consider before proceeding with a self-build mortgage.
A higher interest rate
One of the disadvantages that comes with self-build mortgages is that they usually have higher interest rates than standard residential mortgages. This is because there’s a higher level of risk for lenders. Lenders need to be sure that the self-build project will be completed on schedule and that their loan will be repaid without any issues. You can try to gain a better interest rate by demonstrating that you have carried out extensive research on the project and that it has been thoroughly planned out. Another option is to pay a higher deposit amount to push you into the next lending bracket so that you benefit from a lower interest rate.
A bigger deposit
When it comes to your self-build mortgage deposit, you’ll be expected to pay a substantial amount. This is usually at least 25% of the project’s total cost. Self-build mortgage lenders differ in their requirements and some may insist on a much higher percentage. On the other hand, some lenders accept lower deposit amounts, or even no deposit, depending on your affordability calculations and whether you have additional security to offer.
Extensive documentation
As mentioned earlier, a significant amount of documentation is required when applying for a self-build mortgage. The more information you provide, the better your chances of being approved for a loan. If some of the information is missing, however, you may not be offered the deal you were hoping for.
Alternative accommodation during the project
While your new home is being built, you need somewhere to live. Unless you’re lucky enough to be able to stay with family or friends throughout the building project, you have to fund alternative accommodation. For example, if you already own a home, you need to continue making mortgage payments. If you’re renting somewhere, you need to ensure that you can continue paying rent for the duration of the build.
The funds are released in stages
Unlike standard residential mortgages, the funds for a self-build mortgage are released in stages rather than being paid upfront in full. This is to ensure that each stage of the project stays on track and within budget. The lender has to be sure that you’re sticking to your cost projections to lower their risk. The reason this can be considered a disadvantage is that when these funding stages are paid in arrears, you need to have an adequate income source to cover the building costs before the next set of funds is released.
Financial help for your self-build project
If you need additional help financing your self-build project, you may be able to benefit from the Help to Build: Equity Loan scheme. Available in England, this is a loan that’s provided by the government. It ranges between 5% and 20% of the total estimated costs, or up to 40% in London. You need to have a self-build mortgage in place to be able to receive the loan and this must be via a lender that’s registered with the scheme. Our mortgage brokers can give you further details on the scheme and check your eligibility for a loan. Just give us a call on 01322 907 000 for more information on Help to Build and how you can use it.
Secure a bespoke self-build mortgage for your unique building project
As you’re building a custom-designed home, your self-build mortgage will be specifically tailored to meet your needs. Our mortgage experts – located throughout Kent, London and Edinburgh – are highly experienced at handling this niche product. Obtaining a self-build loan can be a lengthy process with a complex nature but our brokers will deal with the nitty-gritty so that you can concentrate on the plans for your project. They will ensure that you have the right mortgage solution in place to fit your circumstances and funding requirements. When you’re ready to discuss this affordable way to build your dream home, give us a call on 01322 907 000. We work closely with lenders offering self-build mortgages and have access to competitive deals that aren’t advertised publicly.
At Trinity Finance, we can also advise you on the insurance needed for a self-build project as well as alternative funding options that may be better suited to your circumstances, such as remortgaging or obtaining a bridging loan. If it’s out of office hours, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage and protection brokers will reply to you as quickly as possible with further details.
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