Self Build Mortgages
Self Build Mortgages: Develop and build your own house
This type of mortgage is specifically designed for borrowers wanting to build a property for them to live in. Typically, the lender will, depending on affordability, valuation and other criteria, advance upto 75% of the land and build cost for the whole project.
Building your own home
The applicant will usually need to prove from the beginning that they have the full 25% required to complete on their responsibilities. At each stage of the build the lender will value the current position and confirm that everything is being completed satisfactorily before they release the next amount of money (known as a tranche) for the applicant to continue with the build. This process continues at each stage (normally 5) until the build is complete. The property is then checked and providing all aspects are correct a completion certificate issued. At this point, if required our mortgage brokers can arrange for the borrower to refinance the self-build mortgage onto a normal residential mortgage which will often have slightly better interest rates.
Which Type of Self Build Mortgage Should I Choose?
Borrowers in the UK may choose from two primary types of self-build mortgages:
- Arrears Self-Build Mortgages. This is where the funds required are provided in a number of instalments as the project progresses. These types of mortgages are considered suitable for borrowers who already have enough money to make initial large lump-sum payments into the build.
- Advance Self-Build Mortgages. This type of facility provides the money required for each stage of the project at the start of each stage, eliminating the requirement for lump-sum payments and heavy outlays on the part of the borrower. The advance type loan can be extremely useful but is less readily available on the UK mortgage market.
In addition and depending on the project, self-build mortgage applicants may also consider a bridging development loan. With monthly interest rates as low as 0.49%, bridging loans can be uniquely affordable in the short term. Overall borrowing costs on a bridging loan can be significantly lower than those of a comparable self-build mortgage.
Interest Rates on a Self-Build Mortgage
Though not always the case, self-build mortgage interest rates tend to be slightly higher than traditional mortgage and remortgage rates. Additional borrowing costs such as arrangement fees also vary significantly from one lender to the next, which is why shopping around for a good deal comes highly recommended.
It should be possible for borrowers to switch to a more competitive loan with a lower rate of interest when the build is confirmed as habitable by a RICS’ qualified surveyor or similar. The new mortgage rates would mirror those of a standard mortgage or remortgage.
How Much Can I Borrow with a Self-Build Mortgage?
Maximum loan amounts are calculated on the basis of the financial circumstances of the borrower and the specifics of the project. As with most mortgages, your credit history will be scrutinised and your income level examined, along with any outstanding debts you have at the time of your application.
If you have any concerns about your credit history or your ability to provide proof of income, please contact a member of the team at UK Property Finance to discuss the available options.
Key Considerations when Applying for Self-Build Mortgages
If you are thinking about applying for a self-build mortgage, it is important to factor in the following considerations:
Where you will live during the project
You are likely to be asked about your plans for residency for the duration of the project. If you plan on renting a house or flat, this will be factored into the lender’s decision regarding your eligibility to afford the monthly payments of a mortgage.
The type of property/construction
Most lenders impose their own unique restrictions regarding the types of construction they are willing to consider as suitable for lending. Where non-standard properties and constructions are concerned, it can be difficult to attract the attention of mainstream lenders.
Total estimated build costs
Construction projects routinely exceed their initial cost estimations. As a rule of thumb, it is recommended to include at least a 20% contingency in your total build cost estimate. This will help to ensure that you don’t run out of money at the worst possible time.
Documentation to support your application
Alongside proof of income and your current financial status, you will also be expected to provide a variety of documents and reports to support your application. Typical examples of which include:
- Evidence of formal planning permission
- Copy of building regulations approval
- Documentation of total project cost estimates
- Copies of all construction drawings
- Evidence of site insurance and structural warranty
An initial valuation will be carried out to establish current value and anticipated end value and you will be required to pay the valuation fees. Interim and final valuations will be requested and completed by a RICS valuer.
The reports will be presented to the lender to evidence the increase of the interim value(s) prior to any release of funds from the lender and again, you, the client, will pay the valuation fees.
- A typical timescale for processing a stage release mortgage can be up to three months
- Consultants, brokers, banks and building societies will carry out a forensic analysis of all supporting documents and in particular they will focus on income and expenditure cross checked with bank statements
Alternatives to a Self-Build Mortgage?
If you currently own at least one property (residential or commercial), you may be able to fund your self-build project by other means. The equity you have tied up in your existing property could be used as security for a remortgage or a short-term bridging loan. Both of which can be easier to arrange than a self-build mortgage, while keeping overall borrowing costs to absolute minimums.
Whichever lending pathways you choose, it is essential to compare as many deals as possible from specialist lenders across the UK. For more information or to discuss your requirements in more detail, contact a member of the team at UK Property Finance today.