What is a self-build mortgage?
A self-build mortgage is a loan you take out on a property you are building yourself. The biggest difference from a standard residential mortgage is that self-build mortgages are usually paid in stages rather than one lump sum. This reduces the lender’s risk, and also helps you spend your money as planned so you don’t run out during the project. You can usually expect a mortgage lender to pay you in 6 stages:
When you buy the land.
When the foundations are laid.
Once the property is built up to the eaves.
Once the roof is watertight.
Once the interior walls are plastered.
The final instalment is usually paid upon completion.
These payments will usually be made once each stage is completed and a valuer has visited the site. It is also worth remembering that these stages may vary depending on your lender, so it’s important to ensure you’re getting a plan that works for you.
What types of self-build mortgage are available?
There are two main types of self-build mortgage available: arrears stage payment and advance stage payment.
Arrears Stage Payment
Most commonly funding will be released in stages after the construction of each section is completed. Normally a valuer will visit the site before the payment is released. With an arrears stage payment, you may need a loan to cover the work before your mortgage is released, so factor this into your decision.
Advance Stage Payment
Sometimes, it’s possible to get a self-build mortgage where the lender releases money before you pay each bill. This is not usually offered by mainstream lenders so you may be limited to specialist providers.
What are the advantages?
There are many potential benefits of building your own home. Not only can you build the home you want, but there are also some potential financial benefits to consider.
You can save thousands on stamp duty. You will not pay stamp duty on the cost of building work or the value of the property once work is completed. You will only pay stamp duty on the plot of land itself if its value exceeds £125,000. Another potential financial gain is the value of the completed property, which is often worth more than the cost of construction.
What are the disadvantages?
While there are financial gains, be aware that self-build mortgage rates are often higher than those of a standard mortgage. This is because self-build mortgages are not often available from larger lenders.
Self-build mortgages often require high deposits. Deposits typically range from at least 25% to as high as 50%. You’ll likely need substantial savings to apply for a self-build mortgage, especially for arrears stage payments.
Another important thing to consider is where you will live whilst your new property is being built. If you plan to stay in your current home while building the new property, remortgaging could help fund your self-build. However, this is only possible if you have significant equity in your current home. Be aware of the risks before deciding to remortgage.
Choosing to build your own home is an exciting opportunity that could save you money in the long term. It’s sound advice to be aware of what options are available before deciding to take out a self-build mortgage.