Self build mortgage (A complete guide)
In this brief blog, we are going to discuss how to get a self build mortgage and how to get a self build mortgage.
What is a self build mortgage?
A self build mortgage is a mortgage for people who want to carry out their own development and build themselves. This could be because they want to build a custom house or because they like the idea of having created their dream home. Regardless of what their motivations are, a self build mortgage is the type of mortgage they will need to use if they intend to build their own home themselves.
Another big difference between self build mortgages and repayment mortgages is that the mortgage funds are released in stages of development. This helps the mortgage lender manage their risk and ensure that money isn’t given to you without any accountability towards your development milestones.
The timing of when you receive funds from your self build mortgage will differ based on the mortgage lender but it typically goes like this:
You get the initial payment once you have bought the land
You get the second payment one you have laid the foundations for the property
You get the next few payments based on agreed milestones in the property build
You will get the final payments on the property once your roof is watertight and when the walls have been plastered.
Your final payment will then be paid once you have completed the house in full.
Not all self build mortgage lenders lend on the land but you may be able to find a few willing to lend on the land and the property.
The loan to value rates on self build mortgages are usually:
75-90% of the purchase price or valuation (whichever of the two is the lower)
up to 80-90% of build costs
up to 75% of the growth in value of your project at key milestones of the development build.
Types of Self build mortgages
The self build mortgage products available include
discount from standard variable rate of interest mortgage
fixed rate of interest mortgages
bank base rate tracker mortgages
The more broad types of self build mortgages are:
Arrears based mortgage
an arrears-based mortgage releases money in staged payments as each stage is completed
Advance payment release
An advance payment scheme releases money before each stage of construction and removes the need for bridging loans – the stages can be fixed or flexible but there are usually five and these depend on the type of building work
Some stages a self build mortgage lender may insist on include:
* Foundations complete
* Wall-plate complete
* Roof complete
* Plastering complete
* Final completion
Disadvantages of advance payment release self build mortgages
Some of the issues with advance payment release self build mortgages include:
The cost of self-build mortgages which offer advance payment release is much higher than other mortgages due to the mortgage lenders risk.
There are also very few mortgage lenders offering this type of mortgage and hence the rates aren’t competitive
Most mortgage lenders which offer an advance payment release will insist it is secured on a single premium policy which will add to your costs.
Most mortgage lenders will not release the full mortgage funds and will retain 10% until the building has been issued a building control completion certificate
It is vital you speak to any third parties you may have to ensure they will be able to manage with your payment terms so you can ensure your cash flow position isn’t weakened.
How much deposit do I need for a self build mortgage?
You will usually need a mortgage deposit of 20% for self build mortgage but some mortgage lenders may insist on a minimum mortgage deposit of 30%. This is a much bigger requirement than a standard repayment mortgage.
Can you get a self build mortgage with bad credit?
Getting a self build mortgage with bad credit may be difficult as mortgage lenders may usually want to lend to borrowers who have a good credit score and have shown a good repayment history on all their previous debts.
There are however mortgage lenders who will offer a self build mortgage to a borrower depending on what type of bad credit was and what the circumstances were.
If it was a CCJ which was satisfied and is a certain age then some self build mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a maximum amount.
When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you in getting a self build mortgage.
Bad credit could include:
A debt management plan
A home repossession
Can you get a self build mortgage if you are self-employed?
Getting a self build mortgage if you are self-employed is certainly possible but most mortgage lenders may want to see your accounts for 3 years at the very minimum although there may be mortgage lenders willing to offer a self build mortgage with less than 3 years worth of accounts but at least 12 months.
The documents you may need for a self build mortgage include:
Proof of your mortgage deposit
Copy of Building Regulations approval
Copy of site insurance and structural warranty
Architect’s professional indemnity cover (if required)
SAP calculation (this will be in the Building Regulations package)
Your SA302 tax calculation form
Your company accounts if you work through a limited company
You may find using the services of a mortgage broker who has experience dealing with self-employed borrowers.
Other considerations a mortgage lender may take into account when offering a self build mortgage to a self-employed person are:
The Trading style: are you drawing a salary from a company or do you have a claim over a share of retained profits. These could make a significant difference in how much you may be able to borrow.
Your experience: how long have you been self-employed and what is your working history.
Government schemes for a self build mortgage
Unfortunately, you won’t be able to access any government scheme for yourself build mortgage as most government schemes insist to be used alongside a normal repayment mortgage.
The government schemes you may miss out on include:
Some of the Government schemes you may be able to use with a single person mortgage include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save the 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- same as above.
Depending on where you live, you may also have been 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.
List of self build mortgage lenders
Below is a list of self build mortgage lenders in the UK
Bank f Ireland
Progressive building society
Hanley Economic building society
Ipswich building society
The Melton building society
Saffron building society
Newbury building society
Interest rates on self build mortgages
Interest rates on a self build mortgage are usually higher than the interest rates on repayment mortgages. The interest rates on a self build mortgage will start from around 5% and will climb for up to 6% and in some cases more based on the borrower’s mortgage affordability.
You may also notice that the mortgage arrangement fees attached to self build mortgages are much higher than those on repayment mortgages. Most self build mortgage lenders will also only offer a fixed 3 year deal which means redeeming the mortgage within those 3 years may come with a hefty early repayment fee.
At this point you may be wondering if a bridging loan is much cheaper and unfortunately the answer to that is no. Bridging loans are a hit more expensive than self build mortgages and cost from between 0,59% to 1.5% per month. The mortgage arrangement fees on bridging loans are just as high and can be as much as 2% of the total mortgage. The early repayment fees on bridging loans are just as high and you will usually be tied in for at least a year.
Once the property is classed as habitable and this has been confirmed by a RICS’ qualified surveyor and issue of the Building Control completion certificate, some lenders permit the borrower to ‘switch’ to a lower rate of interest during the ‘tie-in period’ without incurring penalty interest.
How much can you borrow for a self build mortgage?
When working out how much you may be able to borrow if you are borrowing alone the first thing you may want to do is check the mortgage lenders mortgage multiple. For self build mortgages it is usually 4.5 times your income and for joint borrowers it is up to 4.5 times the highest salary, plus second applicant’s salary, or 3.5 times joint income
The mortgage lenders mortgage multiple will be the first indication of if the mortgage lender may be willing to lend you the amount of mortgage you want based on your income.
Mortgage multiples are essentially a number by which the mortgage lender multiplies your annual income by to let you know the maximum they will be able to lend to you. When you apply for a mortgage in principle a mortgage multiple is likely what is used as a first indication of if a mortgage lender will lend to you.
Different mortgage lenders have different mortgage multiples so comparing for every mortgage lender may be hard and this is why a mortgage broker who may have experience of the mortgage multiplesbeing used by a mortgage lender.
Mortgage multiples can be a bit misleading as when you get a mortgage in principle you may think that this is some guarantee that you are going to get a mortgage but it isn’t.
After you have found a property which you want to buy, you will usually then go back and make a full mortgage application so the mortgage lender can give you a formal mortgage offer.
At this point, the mortgage lender will request your financial documents such as:
Your SA302 tax calculation form if you are self-employed
Bank statements for at least 3 months
And 3 months worth of payslips
With all this information the mortgage lender will analyse your finances to see how much you have in disposable income per month and if this can cover the cost of your monthly mortgage repayments.
If you can’t cover the cost of your monthly mortgage as you are a single borrower then you may want to consider finding a co-borrower who can split the mortgage deposit with you or who will split the monthly mortgage repayments with you and apply for a joint mortgage.
You should seek independent legal advice when doing this as you may need to go into a tenants in common agreement, a cohabitation agreement and have a declaration of trust agreement if necessary.
Self build mortgage rates.
The self build mortgage rates below are not dynamic. This means they are not live rates and hence he mortgage lenders below may have updated their mortgage rates since this guide was published.
|Lender||Max LTV on Land||Stage required for first payment||Max LTV during construction||Final LTV land and building|
|Beverley BS||Not on land||Wall plate level||Max 75%||Negotiable|
|Buckinghamshire BS*||Max 85%||Land||Max 85%||Max 80%|
|Chorley BS*||Max 85%||Land||Max 85%||Max 80%|
|Cumberland BS||Max 75%||Negotiable||Max 75%||Max 85%|
|Darlington BS*||Max 70%||Land||Max 70%||Max 70%|
|Earl Shilton BS||Max 50%||Land||Max 75%||Max 75%|
|Ecology BS||Max 80%||Land||Max 80%||Max 80%|
|Halifax||Not on land||1st floor level||Max 80%||Max 80%|
|Hanley Economic BS▲||Max 75%||Land||Max 75%||Max 80%|
|Hanley Economic BS*||Max 85%||Land||Max 85%||Max 80%|
|Hanley Economic BS||Max 80%||Land||Max 80%||Max 80%|
|Ipswich BS||Max 75%||Negotiable||Max 75%||Max 80%|
|Loughborough BS||Max 80%||Land||Max 80%||Max 80%|
|Mansfield BS*▲||Max 85%||Land||Max 85%||Max 85%|
|Melton Mowbray BS||Max 85%||Land||Max 85%||Max 75%|
|Newbury BS||Max 66%||Land||Max 75%||Max 75%|
|Newcastle BS*||Max 85%||Land||Max 85%||Max 85%|
|Nottingham BS*||Max 75%||Land||Max 75%||Max 80%|
|Penrith BS||Max 50%||Land||Max 75%||Max 75%|
|Progressive BS||Not on land||Footings||Max 70%||Max 75%|
|Saffron BS||Max 65%||Negotiable||Max 75%||Max 75%|
|Scottish BS||Max 60%||Land||Max 80%||Max 80%|
|Stafford Railway BS*||Max 85%||Land||Max 85%||Max 75%|
|Ulster Bank||Not on land||1st floor level||Max 80%||Max 80%|
|Vernon BS||Max 75%||Land||Max 75%||Max 80%|
|West Brom BS▲||Max 85%||Land||Max 80%||Max 75%|
You should check with your mortgage broker or the self build mortgage lender for up to date self build mortgage rates.
Self build mortgage Calculator
A self build mortgage calculator may be able to help you get an initial idea of how much you may be able to borrow but a true idea of how much you can borrow will be provided by your mortgage broker or the mortgage lender. You should use the self build mortgage calculator as only a guidance.
Advantages of self build mortgages
One of the most important advantages of self build mortgages is that you don’t have to pay stamp duty on self build property as it is classed as building work and there is no stamp duty on the cost of building work. Not paying stamp duty could potentially offer you thousands of pounds in savings which you can use to invest further in your self build home.
You won’t have to pay stamp duty in the value of the property once it’s fully built either. The only time you may have to pay stamp duty is on the cost of the land, if it costs more than £125,000.
Site Insurance and Structural Warranties
“A bank or building society may not release initial funds until you can demonstrate that you have a 10-year structural warranty policy in place. When taking out your warranty, it’s also a good time to ensure that you have the right site insurance policy in place to give you peace of mind should anything go wrong.
Such policies are offered by providers such as:
Self Build Zone
Q Assure Build
Anyone undertaking a build project, whether borrowing or not, should have both in place prior to starting work on site.
Subject to affordability, banks and building societies are keen to lend on residential construction projects, providing you have carried out due diligence and engaged the appropriate team(s) to achieve the successful construction of your new home.”
Self build mortgage FAQs
0Can I get a mortgage to build my own house?
Yes, you can get a mortgage to build your own house. These are known as self build mortgages. They can either pay you the mortgage funds at the beginning or end of development stages. Once the property has been built you can then remortgage into a standard residential mortgage.
Are self build mortgages more expensive?
Self build mortgages are typically more expensive than residential mortgages due to the much greater risks involved for the mortgage lender. Regardless of the costs of a self build mortgage there are still advantages for some borrowers.
Do self build mortgages include land?
Not all self build mortgages will include land. Some lenders will only lend on the construction of the property but you may be able to find self build mortgages for land or land and the property.
Are self build mortgages interest only?
Self build mortgages can be interest-only or capital repayment. You may find that the requirements for an interest-only self-build mortgage are quite high.
Is it cheaper to buy or build a house?
This completely depends on the costs of construction and the cost of purchase of the house in the region you want a house. It may be cheaper to build a house in some regions than to buy but the risks involved may be substantial.
Is it hard to get a loan to build a house?
Getting a loan to build a house is much harder than getting a standard residential mortgage as there are more risks with using a loan to build a house and hence the lender will insist on more stringent checks before agreeing to lend to you.
Can you get a mortgage to build your own home UK?
Yes, you can get a self-build mortgage to build your own house in the UK. These mortgages will help you build your house by releasing funds at stages of your house development. The loan to value rates offered by lenders differ but the cost will typically be higher than standard repayment mortgages.
Can you get a mortgage for land and build a house?
Yes, you can get a mortgage to buy land and then build a house. There are mortgage lenders who will offer you a mortgage to buy the land and then build the house. These could be bridging loan lenders, some mortgage lenders etc
Getting a self build mortgage
Some high street banks may be able to offer you a self build mortgage but usually the specialist self build mortgage lenders will be a better option.
Using a mortgage broker may also be very helpful as self build mortgage brokers may have a lot of experience with the market and be able to recommend you the best mortgage product based on your affordability.
This is a much better outcome than going to a mortgage lender who can only advise you on the products they offer.
In this brief guide, we discussed how to get a self build mortgage and the different features of a self-build mortgage. If you have any questions or comments please let us know.
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.