Building your own home is a dream for many, and is a perfect way to ensure everything is as you’d like it to be. However, it’s so important to get your finances in order first, making sure you have the financial means for the build to go ahead. When building your own home, you will require what is known as a self-build mortgage; standard residential mortgages aren’t applicable here.
Understanding self-build mortgages is important before you embark on your adventure of building your home from the ground up. Watts Mortgage & Wealth Management Ltd explain more.
- What is a self-build mortgage?
- How does a self-build mortgage work?
- Types of self-build mortgage
- Bridging loan vs self-build mortgage
A self-build mortgage differs to a typical mortgage used to buy a house. A standard mortgage sees the money released in one go, while a self-build mortgage is released in stages, coinciding with the build of the property. Finding the right mortgage for your self-build is crucial to ensure the success of the project, making sure you have the necessary funds.
There are different ways in which the money can be released, and this can depend on your circumstances. For this reason, it’s important to seek professional advice when taking out a self-build mortgage, to make sure you find the most suitable solution.
Every self-build project has identifiable stages, which correspond to how the money is released in a self-build mortgage. There are 6 typical stages, which are explained here.
The first is the purchase of the land, which is one of the first things you will do when starting a self-build project. The next step is then the preliminary costs and foundations of the build, which is where you will the see the project slowly begin to take shape.
The third and fourth stages are the wall plate level, and making sure things are wind and watertight. The fifth stage is the first fix and plastering, with the sixth and final stage representing everything from the second fix to completion.
There are two types of self-build mortgages that you should consider, known as the arrears type and the advance type. An arrears self-build mortgage is where payments are given as each stage of the build is completed. This is often suited to those who have their own cash injection to put into the project.
An advance self-build mortgage is where the stage payments are released at the start of each stage, which is suitable if you need the money for labour and material bills. One advantage of an advance type is that you would not need to borrow money via a bridging loan to cover the finances.
Typically there is much more paperwork involved in taking out a self-build mortgage as you will need to produce detailed plans for the project. You will likely need to provide plans, breakdown of build costs, proof of planning permission and Building Regulations approval. It may be important to also consider a contingency fund for any problems that might arise in the future of the build.
Consider where you intend to live while you complete your self-build project, as this will have an impact on your affordability and your borrowing capabilities. Rental or other mortgage payments that you are paying will affect how much you can borrow.
All lenders have different criteria when it comes to self-build mortgages, but it’s important that they are aware of the build type and any payment terms that have been set by your supplier. Some lenders may have strict criteria on certain construction systems, so it is worth checking.
It’s important to remember that interest rates are typically higher with a self-build mortgage, but most lenders will offer a product switch at the end of your build. This means you will be able to move to a mortgage product with a lower rate. You might also experience higher arrangement fees, but this can depend on the broker or lender you are dealing with.
If you already own a home or have enough equity in it, you may be able to take out a bridging loan to pay for the new plot or fund the build costs. Once you had sold your existing property, this money could be used to pay off the loan. This can be an alternative choice to a self-build mortgage, but it’s important to remember that it can be an expensive way to borrow money for a project, and if you fail to keep up repayments of the loan you could lose your property.
It’s important to make sure you get the right financial advice from an independent professional before taking out any financial products such as a loan or mortgage. Consider aspects like a typical timescale for the project, and be as organised as you can with your supporting documentation that will be required.