What is a Self-Build Mortgage?
A self-build mortgage is a loan you take out to fund a property that you are building yourself. The main difference from a standard residential mortgage is that you receive the funds in stages as parts of the build are finished, rather than a single lump sum.
This reduces the lenders risk and ensures that the money is spent as planned. Typically, you would receive the first payment when you buy the land, you’ll then receive more when the foundations are laid and a further payment when the property is built up.
Not all lenders participate in the self-build mortgage sector, and those that do typically apply a higher interest rate for such mortgages. Self-build mortgages require frequent site inspections and entail extra administrative duties. As a result, the application process for a self-build mortgages may take longer than usual.
There are two types of self-build mortgages
Arrears
An arrears self-build mortgage is where the payments are handed out after each stage of the build is completed. This type of mortgage is better for people that have a lot of cash on hand to help pay for the project.
Advance
An advance self-build mortgage is when payments are released at the beginning of each stage, making money available when the bills for material and labour are due. This type of mortgage helps with cashflow and is better for people who have less money on hand to fund their projects. However, fewer lenders are prepared to offer this kind of mortgage.
Lending Requirements
For a self-build mortgage, the lender will often require the following:
- Planning permission
- Plans of the property
- Estimation of the building costs
- Valuation upon completion and during construction
- That borrower potentially appoints a professional builder/project manager rather than doing it themselves
- Some lenders may require the borrower to have already purchased the land before applying for the mortgage.
