With your dream home in mind, one way to turn it into a reality is to build it yourself. This can be an exciting prospect but also a daunting one, especially when it comes to how you’re going to fund it. Unless you have savings to cover the costs of the build or are able to get financial help from family members or friends, you’re going to need a self-build mortgage.
This is a specialist type of mortgage that’s specifically designed to fund self-build projects and is a higher risk for lenders. As such, it can be more challenging to arrange than a standard residential mortgage. So, bearing that in mind, can you get a self-build mortgage if you have a bad credit rating?
What is a self-build mortgage?
A self-build mortgage can be used to buy a plot of land to build your home on, to build your home, for a property conversion or extensive renovation work.
It differs from a standard residential mortgage in how the funds are released. Normally, when you apply for a mortgage to buy a property, all of the funds are released in advance. The funds for a self-build mortgage, however, are released in stages throughout your project. This ensures that you have adequate finances in place for each construction phase and reduces the risk for the lender.
Self-build mortgages are available in two types — advance and arrears.
Advance
With an advance loan, the lender releases the funds at the start of each building phase. That way, you have adequate funds to pay for any materials and labour costs as needed. If you don’t have any other funds to use, such as savings or equity in another property, an advance self-build mortgage is beneficial. Not all lenders agree to advance funding, however, and those that do may keep a percentage of your loan amount until the completion certificate has been received for your property.
Arrears
This is the most common type of self-build mortgage. With this option, the lender releases the funds at the end of each building phase. A property valuer checks your site at the end of each phase to confirm to the lender that it has been completed. At that point, the lender releases the funds. As less risk is involved for the lender, a more competitive rate is offered than for an advance self-build mortgage. However, you need to have adequate funds upfront to cover all of the costs until the lender releases the funds.
The funding stages
Funds are generally released by lenders to cover the following stages of building a home:
- Purchase the plot of land
- Complete the foundations
- Erect the walls
- Make sure the property is wind and watertight
- Carry out the plastering, plumbing and electrical works
- Implement the final fixes for completion of the build
Are you eligible for a self-build mortgage?
You don’t need to have any knowledge or experience in house-building to apply for a self-build mortgage. Although the term is ‘self-build’, you can hire a team to build your home for you. This can include a site manager, a surveyor, an architect and a team of builders. You can also apply for a self-build mortgage if you’re a first-time buyer. Our mortgage brokers deal with specialist lenders that offer more flexibility when it comes to their lending criteria. This means that they can help you to overcome any potential obstacles, such as having a bad credit rating, being self-employed or wanting to build a home that has a non-standard construction.
How much can you borrow with a self-build mortgage?
Lenders generally offer self-build mortgages with a loan-to-value ratio of 75%, depending on your affordability. This means that a large deposit is needed, being 25% of the value of the building project. If the high deposit requirement puts a self-build mortgage out of your reach, you can get help through the Help to Build scheme. Self-build mortgages pose more of a risk to lenders than standard residential mortgages. As well as requiring a substantial deposit, they charge a higher interest rate to compensate them for the risk.
Can you get a self-build mortgage with bad credit?
Self-build mortgages are complex to arrange and having a bad credit rating can make it more challenging to be approved. However, it is possible, depending on the lender’s requirements and the extent of your bad credit. We deal with specialist lenders that offer more flexible approaches for complicated scenarios. With a bad credit rating, you may have to pay a higher interest rate or adhere to stricter terms.
To increase your chances of being approved for a loan, it can be a good idea to improve your credit rating before applying. For example, you can repay any outstanding debts, refrain from applying for any new lines of credit and ensure that all bills are paid on time. Alternatively, you can wait until you have a bigger deposit to put down as this will reduce the lender’s risk.
Arrange your self-build mortgage
Our mortgage brokers are well-versed in dealing with self-build mortgages for complex circumstances, such as having a bad credit rating. They can discuss your credit status in detail before tailoring your application and approaching the right lender to handle your case. Just give us a call on 01322 907 000 to speak with one of our specialist brokers about arranging your self-build mortgage.