Building your own home can be an exciting opportunity, but it’s important to know how to finance your build before you begin building your dream home. A standard residential mortgage is not available for self-build properties, meaning you may miss out on the , so it’s important to be clear on what a self-build mortgage involves. This guide will take you through what a self-build mortgage is, the different types available, and the advantages and disadvantages, to help you decide whether a self-build mortgage is right for you.
In This Guide:
- What is a self-build mortgage?
- What types of self-build mortgage are available?
- What are the advantages?
- What are the disadvantages?
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 to the eaves.
- After the roof is made 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 these stages may vary depending on your lender, so it is important to to ensure you are getting one 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 you must factor this into your decision.
Advance Stage Payment
Sometimes it’s possible to get a self-build mortgage where the lender releases the 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 for financial gain is in the value of the completed property which is often worth more than the cost of constructing it.
What are the disadvantages?
Whilst 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.
Deposits for self-build mortgages are often high. You usually need a deposit of at least 25% and it can be as high as 50%. You are therefore likely to need substantial savings in order to apply for a self-build mortgage, especially for arrears stage payment.
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 whilst building the new property, remortgaging that home could be a possibility and may help fund your self-build. However, this is only possible if you have a significant amount of equity on your current home and you must be aware of the risks involved before deciding to remortgage your current home.
Choosing to build your own home is an exciting opportunity which could save you money long term. It’s sound advice to be aware of the what are available to you before deciding to take out a self-build mortgage.