Mortgage on a building plot (3 point guide)

In this brief guide, we are going to discuss getting a mortgage on a building plot, how to get a mortgage on a building plot and the considerations you should make.

Can you get a mortgage on a building plot you already own?

Yes, you can get a self-build mortgage for a building plot you already own.

Self-build mortgages are a type of development mortgage which allows you to manage the build of a property.

A self-build mortgage will usually provide you with the total cost of a build but will release these funds to you as you hit your development milestones.

You may find that you will have more mortgage options due to the fact that you already own the building plot and all you need is money for the actual structure. 

This will of course limit the amount that the mortgage on a building plot lender will have originally have had to give you if you didn’t already own the building plot and in some ways limits the mortgage lenders risk.

Getting a mortgage on a building plot you already own still faces the same problem as other mortgages in the fact that they are still risky and dependent on you completing the building project on the time allocated without you over exceeding your budget.

If you exceed your budget on the self-build mortgage then you may find that the mortgage lender is unwilling to lend more to you.

The loan to value rates for a mortgage on a building plot you already own will be around 60% to 70%. You may even get loan to value rates at 80%.

Self-build mortgages aren’t the only option if you already own the plot. You could simply remortgage the building plot and use the equity released to develop the property before remortgaging to a standard remortgage and clearing your original mortgage balance. 

Remortgaging the building plot may also be an option if you find out that you have exceeded the self-build mortgage that you were given as building costs were underestimated or spiralled out of your control.

If you already own the building plot but your capital reserves are low, you can remortgage the building plot in order to raise initial finance to cover the building costs and bridge the gap between your self build loan and the total cost estimated in your budget plan.

How much mortgage deposit do you need for a self-build mortgage?

You will usually need around a 30% mortgage deposit for a self-build mortgage but this may be much higher depending on if you have bad credit or are self-employed.

If you already own the building plot then you may be able to use the plot as collateral in order to secure a self-build mortgage.

Types of mortgages on building plots

Whether you own the building plot or not there are two types of self-build mortgages.

The differentiating factor between the two types of self-build mortgages is when the funds are released during the development.

  • funds are released when you complete a particular milestone or at the stage of the building.

Arrears self-build mortgage

An arrears mortgage on a building plot may be more suitable to you if you already have the capital to fund the initial purchase of equipment and payment of building staff. 

With this option you will likely take more care as the funds will be debited from yourself first before credited back to you by the lender. If you go over your budget then, of course, you will have a shortfall between what the self-build lender pays you at the end of the milestone and what you spent.

An arrears mortgage on a building plot option is also good if you already own the plot and want to remortgage it as a source of funds before recouping these funds from the self-build mortgage.

In advance self-build mortgage

With an in advance self-build mortgage, funds are released before each stage of the build.

If you are unsure of which mortgage on a building plot option is best for you regardless of if you own the building plot already or not then speak to a mortgage broker who may be able to analyse your situation in more depth and provide you with a recommendation.

Do you need planning permission for a self-build mortgage?

Yes, you may need planning permission for a self-build mortgage as most self-build mortgage lenders will want to see that you already have planning permission arranged before they lend to you. Getting a mortgage on a building plot can take a very long time and this will all be a waste if you don’t have planning permission already sorted out.

In the UK, planning permission usually comes in two stages –

Outline consent planning permission –

-agreement with the local authority to build on the plot of a plot but no agreement for the specifics of the property

Detailed consent planning permission

  • agreement on the specifics of the property

Some self-build mortgage lenders will give you an initial advance if you have outline consent planning permissions but if you end up not getting the full detailed consent you will likely have to pay the money back and deal with any costs associated with returning the plot back to its original state.

Alternatives to self build mortgages

There are a few alternatives to a self-build mortgage you may want to consider regardless of if you already own the a plot or not.

Some of those include:

Bridging mortgages

Construction mortgages

Commercial mortgages

Personal loans

Remortgaging an existing property

Equity release products

Unsecured business loans

How to get a mortgage on a building plot if you already own the plot

If you already own the plot then self-build mortgage process is relatively the same. You should consider if speaking to a self build mortgage broker may be a good option for you as self build mortgage may be considered a specialist area of the mortgage market.

Use a Government scheme

Government schemes help you reduce the amount of mortgage deposit you may need to put down, reduce the price of the property or create a structure that increases your mortgage affordability much sooner than it would have been.

Some of these include first-time buyer government schemes whilst others in this list are accessible to you even if you are not a first-time buyer.

Government schemes are not available to you if you are getting a buy to let mortgage.

The Government schemes include:

  • Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
  • Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
  • Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
  • Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
  • Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
  • Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
  • Right to buy– allows you to buy your home at a discount price.
  • Preserved right to buy– same as above.
  • Right to acquire– similar to the above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

In this brief guide, we discussed getting a mortgage on a building plot, how to get a mortgage on a building plot and the considerations you should make.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.