If you’re going down the route of building your own home then you should know that a conventional residential mortgage won’t do. Rather, you’ll have to apply for a specialist type of mortgage loan known as a self build mortgage.
One of the fundamental aspects of home-building is the funding behind it, without the proper financing your dream housing project won’t be able to take off. That’s why for this article we’ve teamed up with mortgage experts at The Mortgage Genie to cover everything you need to know about self build mortgages.
What is a Self Build Mortgage?
Fairly evidently, a self build mortgage is a loan that you take from a lender which is used exclusively towards the construction of a property that you’re building independently. This is in contrast to a standard residential mortgage wherein you take a loan out for a property that’s on the housing market.
As the nature of the two property types differ, so too does the mortgage loan. The standout difference is that rather than a single lump sum being loaned to you, the lender instead releases the money in phases that each coincide with certain milestones in the project. For instance, the first portion of the loan will be released to cover the initial purchasing of the plot and the second will be dedicated to covering the property’s foundations etc. The final instalment will be given upon the property’s completion. This is used as somewhat of a financial plan for the property as well as a means of reducing risk on the lender’s behalf should the project get abandoned at any point.
How do Self Build Mortgages Work?
There are two types of self build mortgages, namely, arrears and advance payment self build mortgages. The difference between the two is down to at what point the loan is paid out, whether before or after the completion of a key milestone.
If you were to go with the advance stage payment option then your chosen self build mortgage lender would give you the relevant sum of money before the beginning of a particular stage of the building. And if you were to choose an arrears based self build mortgage then your lender would give you a mortgage loan portion after the completion of a certain stage, i.e., reimbursement.
The type of self build mortgage loan that’s right for you is entirely dependent on your personal financial situation. For instance, If you don’t have a lot of cash on hand to pay for resources and workers then the advance stage payment option is likely more suitable and vice versa. You should also be aware that interest rates are typically higher for self build mortgages, as compared with standard residential mortgages – around 3-6%.
What are the Advantages of Self Build Mortgages?
Besides the obvious advantage of having a house that’s perfectly tailored to your personal specifications, the most notable benefit of a self build mortgage is that you don’t have to pay stamp duty on the completed property.
This is because stamp duty isn’t levied either on the final property value, nor the building fees. Ultimately, this will save you thousands of pounds in the long run. You will, however, have to pay stamp duty on the land itself if the cost of it exceeds £125,000.
Can I get a Self Build Mortgage?
Self build mortgages are considered riskier than standard residential mortgages, this means that lenders can be more hesitant when approving such a loan. Consequently, there are qualifying factors that you’ll have to meet if you want to stand a chance.
Firstly, you’ll require a large deposit as lending is generally capped at 75% of the combined cost of both the land, and the building itself. Figures and specifics can vary here, however, so it’s well worth considering a mortgage broker to help navigate through the options that are available to you.
As well as this, you’ll also need to have property plans along with supporting documents like planning permission for the land alongside architectural drawings. And finally, as with any mortgage, a good credit history with proof of reliable income is always an advantage.