If you are considering building your own home, there are many financial decisions to make and factors to think about before deciding whether it is the best option. If you have the capital to pay for all of the materials and contractors upfront, then this will make the process a lot simpler but most people will require a mortgage for a self-build property to cover all of the related costs.
Getting any type of mortgage can be difficult but generally, the more obscure the type of mortgage, the fewer lenders there are and therefore, the harder it will be to obtain a mortgage.
How do self-build mortgages work?
Self-build mortgages are quite different to a standard residential mortgage where the lender provides you with a loan for the full amount of the property value, minus the deposit required.
With a self-build mortgage, you will need to provide more information and evidence than with a standard mortgage. For example, you will need to do everything in stages.
The first step is to purchase the land and an amount will usually be released at this stage to pay for this. The lender only releases money at certain milestones of the building project to minimise the risk of losing any money.
When the foundations go in, this is usually when the next part of the mortgage loan will be released. Then when you have the roof built, another payment is available and finally, when the house is sealed and complete, the final amount of the loan will be made. You can find out more information about how mortgages work from a broker or a lender who specialises in providing self-build mortgages.
Requirements for applying for a self-build mortgage
Once you have found a lender who provides self-build mortgages, they will ask you to demonstrate why the home is affordable. You will need to show the lender your building plans for the property, which will need to include a full breakdown of the costs involved, as well as how the project will be managed.
Generally, with a self-build mortgage, you will be required to put down a higher deposit than you would for a standard residential mortgage, as the lender is taking on a higher risk. If the costs of your building project are not well-managed and the property ends up costing more than originally planned, there is a risk that the property will not get finished, or the lender would need to provide a bigger loan than originally agreed.
Another drawback of taking out a self-build mortgage is that you will usually have to pay a higher interest rate on your mortgage. By using a specialist broker who arranges self-build mortgages, you should be able to find a good deal where you are not paying a really high-interest rate.
Like with all types of mortgages, there will be other factors that will be taken into account when you apply for a self-build mortgage. For example, the lender will do a credit check on you to see if you have any adverse credit. Any issues such as missed payments, CCJs and bankruptcy will affect your ability to get approved for a mortgage. Therefore, it is a good idea to check your credit report by using a credit reference agency before you start the application process.
If you discover that you have some missed payments on your credit history, you might want to wait until you have been able to improve your recent credit history by making all of your payments on time for six months or more. This should help to improve your chance of having your self-build mortgage approved.
Other factors that will impact your mortgage application include how much additional outstanding debt you have. If you have a significant amount of other debt, it might be a good idea to try and pay some of it off before you apply for your mortgage. The more outstanding debt you have, the lower amount you are likely to be able to borrow, as your affordability calculation will show you have lower affordability when you are paying off other debt each month.
While finding a good self-build mortgage can be more difficult and you may need to pay a higher interest rate, many people are able to make huge savings on building their own house compared to buying a property that has already been built, so it is generally worthwhile the extra effort involved.