Can You Get a Mortgage to Build a House? Self-Build Finance Explained
Did you know that approximately 200,000 people in the UK embark on self-build projects each year? Building your own home might seem like a distant dream, but it's more attainable than you think, especially with the right self-build finance. This comprehensive guide will navigate you through the world of mortgages designed specifically for constructing your dream home.
What is a Self-Build Mortgage?
A self-build mortgage is a specialised home loan designed to fund the construction of a new property. Unlike a standard mortgage, which is typically advanced as a lump sum upon completion, a self-build mortgage releases funds in stages as your building project progresses. This is crucial because you'll need money to pay for materials, labour, and other associated costs throughout the build.
How Does a Self-Build Mortgage Work?
1. Application & Approval
You apply for a self-build mortgage, similar to a regular mortgage. Lenders will assess your financial standing, the project's viability, and the estimated build costs.
2. Stage Payments
Once approved, funds are not given all at once. Instead, they are released in instalments at specific milestones in the construction process. Common stages include:
- Foundation damp-proof course
- First-floor joists
- Roof structure
- First fix (electrical and plumbing)
- Second fix (plastering, fixtures)
- Completion
3. Valuation
A surveyor will typically visit the site at each stage to verify that the work has been completed to a satisfactory standard before releasing the next payment.
4. Interest
You usually only pay interest on the amount of money you've drawn down so far. This can be a significant advantage, as your mortgage balance grows with the build.
Types of Self-Build Mortgages
While the core principle remains the same, there are a few variations:
Traditional Self-Build Mortgages
These are the most common type, where the lender assesses your project and releases funds in stages, as described above. They are often secured against the land you own and the future property.
Construction Loans
Sometimes used interchangeably with self-build mortgages, construction loans can be more flexible. They might be offered by specialist lenders and can sometimes be used for renovations or extensions as well as new builds. The release of funds might be structured differently.
Bridging Loans
Bridging loans are short-term, high-interest loans. They are typically used to 'bridge' a funding gap, for example, if you need to buy land and start building before your main self-build mortgage is fully approved or before you sell an existing property. They are not ideal for the entire build due to their cost.
Eligibility Criteria for Self-Build Mortgages
Lenders want to see that you are a responsible borrower and that your project is sound. Key criteria often include:
Financial Stability
Financial Requirements
- Good Credit History: A strong credit score is essential. Lenders will check your credit report for any defaults, County Court Judgements (CCJs), or Individual Voluntary Arrangements (IVAs).
- Stable Income: You'll need to demonstrate a reliable and sufficient income to support the mortgage repayments, even during the construction phase. Lenders often require proof of employment or business accounts.
- Deposit: While some self-build mortgages might require a smaller deposit than a standard mortgage (as the land is often part of the security), you'll typically need at least 10-25% of the total project cost. This can include the cost of the land.
The Build Project
Project Requirements
- Planning Permission: You must have full planning permission for your build before a lender will consider your application. This proves the council has approved your plans.
- Detailed Plans & Costs: Lenders will require detailed architectural plans, structural surveys, and a comprehensive breakdown of projected costs. This is often compiled by an architect or quantity surveyor.
- Experienced Builder (Often): Many lenders prefer or even require you to use a reputable, established builder who is registered with a scheme like the National House Building Council (NHBC) or similar warranty providers. This offers protection for both you and the lender.
- Project Management: You, or your appointed project manager, must demonstrate competence in managing a construction project.
The Costs Involved in Self-Building
Understanding the financial outlay is paramount. Costs can be broadly categorised:
Land Purchase
This is often the most significant upfront cost. Prices vary wildly depending on location, size, and whether it has existing planning permission.
Professional Fees
- Architects: For designing plans and overseeing the build.
- Surveyors: Structural engineers, land surveyors.
- Project Managers/Quantity Surveyors: For cost management and scheduling.
- Legal Fees: For conveyancing the land and contracts.
Construction Costs
- Materials: Bricks, timber, insulation, roofing, windows, etc.
- Labour: Tradespeople such as bricklayers, plumbers, electricians, and carpenters.
- Plant Hire: Diggers, scaffolding, etc.
Internal Finishes
Kitchens, bathrooms, flooring, lighting, decoration.
External Works
Landscaping, driveways, fencing.
Contingency Fund
Important: Contingency Planning
It's vital to have a contingency fund of at least 10-15% of the total build cost to cover unforeseen expenses.
Other Costs
- Building regulations fees
- Site insurance
- Utility connections (water, electricity, gas, broadband)
- Potential VAT on materials and labour
The Application Process: Step-by-Step
Navigating the mortgage application can seem daunting, but breaking it down helps:
Step 1: Secure Land and Planning Permission
This is non-negotiable. Without these, you cannot apply for a self-build mortgage.
Step 2: Develop Detailed Plans and Costings
Work with professionals (architects, quantity surveyors) to create robust plans and a precise cost estimate. This document is key to your mortgage application.
Step 3: Find a Specialist Lender or Broker
Not all high-street banks offer self-build mortgages. Look for specialist lenders or, more commonly, use a specialist mortgage broker who understands this niche market. They can guide you to the best products and help with the application.
Step 4: Submit Your Application
Provide all required documentation: proof of income, credit history, land ownership, planning permission, detailed building plans, costings, and evidence of your chosen builder's credentials.
Step 5: Lender Assessment and Valuation
The lender will review your application and arrange for a surveyor to assess the project's feasibility and costing.
Step 6: Mortgage Offer and Legalities
If approved, you'll receive a mortgage offer. Your solicitor will handle the legal aspects, including the mortgage deed.
Step 7: Commence Building and Stage Payments
Once the initial funds (often for land purchase) are released and building begins, you'll notify the lender at each pre-agreed stage. The surveyor will visit, and upon their approval, the next payment will be released directly to your solicitor or builder.
Tips for a Smooth Self-Build Mortgage Journey
Essential Tips for Success
- Work with Experts: Engage a good architect, a reliable builder, and a specialist mortgage broker early on. Their experience is invaluable.
- Be Realistic with Costs: Over-optimism can lead to funding shortfalls. Build in a generous contingency.
- Understand the Payment Schedule: Know exactly when and how funds will be released. Discuss this thoroughly with your lender and builder.
- Maintain Clear Communication: Keep your lender, broker, and builder informed of progress and any potential issues.
- Get Everything in Writing: Ensure all agreements, especially regarding payments and timelines, are documented.
- Consider Your Exit Strategy: How will you repay the mortgage once the build is complete? This is usually by remortgaging onto a standard product or selling the property.
Can You Build a House with a Standard Mortgage?
Standard Mortgages vs Self-Build Mortgages
Generally, no. Standard residential mortgages are designed to fund the purchase of an existing property. Lenders release the full amount upon completion and the property acting as security. They are not structured to release funds incrementally for a construction project. The risks are too high for them, and the process doesn't align with the phased nature of building.
The Role of a Specialist Mortgage Broker
Navigating the self-build mortgage market can be complex. Specialist brokers offer significant advantages:
Benefits of Using a Specialist Broker
- Market Knowledge: They know which lenders offer self-build products and their specific criteria.
- Access to Products: They may have access to exclusive deals not available directly to the public.
- Application Support: They can help you prepare your application, ensuring all necessary documentation is included, which can significantly improve your chances of approval.
- Negotiation: They can negotiate terms on your behalf.
The Future of Self-Build Finance
The self-build sector is growing, and with it, the availability and innovation in finance. We're seeing more lenders enter the market and a greater understanding of the unique needs of self-builders. Government initiatives aimed at increasing housing stock may also further support the self-build market.
Conclusion
Building your own home is a significant undertaking, but with careful planning and the right self-build finance, it's a rewarding path to creating a bespoke living space. Understanding the process, eligibility, and costs, and seeking expert advice are crucial steps. A self-build mortgage provides the financial framework, enabling you to turn your architectural vision into a tangible reality, brick by brick.
At Tapton Capital, we understand the complexities of self-build finance and property development. Whether you're planning your first self-build project or looking to expand your property portfolio, we can help you navigate the financing landscape and find the right funding solution for your needs.
Frequently Asked Questions (FAQs)
Yes, some lenders will include the land purchase within the self-build mortgage. However, you will typically need a substantial deposit and a clear plan for acquiring the land.
The deposit requirement varies but is often around 10-25% of the total project cost, which may include the land. Some lenders might be more flexible if you have a strong application and a robust build plan.
The process can take longer than a standard mortgage, often 3-6 months, due to the detailed assessments of your plans, costings, and the phased nature of funding.
This is where your contingency fund is vital. If you exceed your budget and require additional funds, you may need to seek further finance, which could involve a top-up loan, remortgaging, or using personal savings.
Generally, self-build mortgages are for new constructions. For major renovations or extensions, you might need a different type of loan, such as a home improvement loan or a specialist refurbishment mortgage, although some construction loans might cover extensive works.
The biggest risks often involve cost overruns and delays in the construction schedule. These can impact your ability to meet mortgage repayments or complete the project. Thorough planning and a good contingency fund are essential mitigation strategies.
Get Expert Help With Self-Build Finance
Speak to Tapton Capital about how we can help you navigate self-build finance. Whether you're planning your first self-build project or looking to expand your property development portfolio, we provide tailored funding solutions to support your construction goals.
Talk to a Funding Specialist