Mortgages Knowledge Hub

A Guide to UK Self-build Mortgages

Self-build mortgages are home loans taken out on a property that you are building yourself, typically paid out in stages. We explore the differences between self-build mortgages and standard residential mortgages.

Are you looking to self-build your next home, you crazy, wonderful fool? For many of us, creating our own unique property from scratch is the ultimate homeowner’s dream, but very few of us make it a reality.

We don’t like to get our hands dirty

Building your own home is a sensible and cost-effective option for many UK citizens. But as a nation, we’re way behind the rest of Europe when it comes to self-building.

In Austria, around 80 per cent of all homes are built by their owners. In Germany, France and Italy, the figure is around 60 per cent, whilst here in the UK only 8-10% per cent of us take the plunge and embark on a self-build project each year (that’s around 10,000 homes per annum.)

Self-builders are spoiled for choice

For some, the idea of securing finance for a self-build project may be extremely off-putting. In reality, a healthy selection of self-build mortgages is available from a wide range of providers, with the range growing year upon year, as the practice becomes more widely accepted.

The UK government is also keen to promote self-building as a viable option for homeowners and supports a number of schemes which aim to encourage more of us to consider creating our own property in the future.

What makes self-build mortgages different?

Whether you’ll be doing most of the building work yourself, or you’re going to use a specialist contractor to build your home, a standard residential mortgage is not applicable to any self-build project.

Unless you’ve squirrelled away a lump sum to fund your building work outright, you’ll need to secure a specialist mortgage that considers the differences and additional risks involved in building your own home.

The main difference between self-build and standard mortgages is that they’re paid out in pre-agreed stages, rather than as a single, lump sum at the start of a fixed term. From the initial digging out of the foundations to the final fixtures and fittings, the total sum borrowed will be divided into equal chunks and paid over only once each stage of work has been completed.

Self-build mortgages are paid in instalments to help ensure that projects are continually funded as they progress, reducing the risk posed to both borrower and lender in terms of money running out before the project is completed.

How are self-build mortgages paid out?

Traditional self-build mortgages are paid out in arrears, after the lender has released the funds to buy the plot of land for the build. Usually, a valuation expert from your mortgage company will visit the build site in order to check that each stage has been completed as agreed, before the funds to cover this work are released.

Working on this basis means that self-builders often need to find alternative finances to keep their projects going until stages are reached and cash is released (this often involves further borrowing, or the sale of an existing home).

Some mortgage companies will consider paying up front for each stage of the build, which is necessary if you don’t have any cash to pre-fund your project (for instance, to secure the plot of land or to buy initial building materials).

How expensive are self-build mortgages?

While self-build mortgages can be more flexible than standard, rates on these tend to be higher, due to the increased risk lenders might face. It’s important, therefore, that you shop around for the most competitive deal, also consulting a specialist self-build mortgage broker who can talk you through available options, in order to locate the best product for your specific needs.

Self-build mortgages do appear as an option on some price comparison sites, so it’s worth doing some initial research on here, in order to familiarise yourself with the type of deal you might expect.

A little more paper pushing

Self-build mortgages are, overall, a little more complicated to arrange than standard mortgages. For this reason, you should expect to spend longer taking care of paperwork throughout the process. Before a mortgage can be agreed, applicants are usually asked to produce detailed build plans drawn up by a reputable architect, along with a robust budget and proof of planning permission for the build.

Stamp duty costs

Taking out a self-build mortgage could save you thousands on stamp duty, as this will not need to be paid on the value of the building work carried out, or on the value of the property once this has been completed. Normally Stamp Duty is only payable on the cost of the land itself, and only if this is in excess of £125,000.

What sort of deposit does a self-build mortgage require?

The deposit required to secure a self-build mortgage is often much higher than what a standard mortgage provider might expect. In general, lenders are looking for a contribution of at least 25 per cent, and sometimes as much as 50 per cent for large, lengthy projects, which will eat into any capital you may have for the build.

Additional costs

When purchasing a standard property, it’s usual to move out of your old home and into the new one on the same day (unless you’re planning extensive renovation work, which will make living in your new pad impossible). Those who choose to self-build often have to factor the cost of building their new property alongside paying for accommodation while this takes place, often over many months if not a year or more.

Final considerations

As a self-build project can be challenging and often stressful, it’s important to find a mortgage provider that not only gives you a great deal, but also provides an excellent service and is on hand to help smooth bumps in the road. Taking part in a self-build project is stressful enough without your mortgage becoming a separate headache.

Planning a self-build project may be more complex and stressful than buying a ready-built home, but the process of securing a self-build mortgage definitely doesn’t have to be.

Written by Jim Kersey

    Published on 10-12-2019

Jim brings together unique data insights, contextual knowledge and thought provoking themes, to shed new light on important issues affecting both UK businesses and individuals.

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