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A self-build mortgage is a mortgage that is specifically designed for those looking to build their own home. A self-build mortgage is different from a residential mortgage in that money is given out in stages as the house is built to reduce the risk for lenders and to ensure that the money being lent is being used for the purpose of building the property. However in some cases lenders will offer residential mortgage rates for those looking to build their own homes.
A self-build mortgage provides you with the money needed to buy everything to build your home, which can include anything from buying building materials to paying contractors and workmen. The money will only be released once specific stages of the house are complete, for example once the foundations are laid, to ensure that the funds are used solely for the purpose of building a house. If you go over budget and cannot complete the next stage, your mortgage lender won’t release any more money until the stage is completed.
Building a home is often cheaper than buying a house but unexpected costs can arise. It is important to remember with a self-build, you will have to deal with any problems yourself, for example managing any unexpected costs or overspend, or dealing with unreliable contractors.
Yes, because a self-build mortgage is usually a higher risk for mortgage lenders, the rates are normally higher than with a typical or equivalent loan-to-value (LTV) residential mortgage. This is why it is a good idea to remortgage once the house is completed (bearing in mind any early repayment charges and the cost of any new fees for the remortgage). In addition, you may find that once the property is complete, if the valuation has increased since you started your new build project, your LTV will also immediately improve and could put you in a lower LTV bracket.
A self-build mortgage will normally only need to last for as long as it takes to build the house. They can be as short as two years, but remember if you want to pay off your self-build mortgage early, you will often have to pay a penalty fee to do so.
Just as with a residential mortgage, you do need a deposit for a self-build mortgage. The deposit amounts vary depending on the lender, but the average deposit needed at the time of writing is between 20 and 25%.
The option to be able to buy a plot of land with a self-build mortgage varies depending on the lender. If you need to use the money to buy land make sure you check that this is possible with the lender before taking out the loan.
Each provider will have their own specific requirements about who they accept for a self-build mortgage and you will need to meet their affordability requirements in exactly the same way as a standard residential mortgage. Ensuring you have a stable regular income, a good credit score and little to no debts will help towards being accepted for the best self-build mortgage rates available.
If you find yourself in the position of needing more money to complete a stage of the build you should speak to your mortgage lender to see if they can agree to release funds sooner from a subsequent tranche or increase the overall mortgage. If this is not possible, then a bridging loan may be an alternative. Sometimes credit cards can be used when extra funds are needed, but they should only be used if you can get a 0% interest deal and can pay back the money before interest is added. When needing extra money, it is important that you shop around to find the best rate, but also to ensure that you don’t get into lots of debt that you will struggle to pay off.
As long as you have the deposit needed for the self-build mortgage, as well as meeting the mortgage lenders’ requirements and affordability criteria, then most self-build mortgage lenders will accept applications from first-time buyers.
At the time of writing, a range of high street banks and building societies offer self-build mortgages. To find the best deal for you it is best to speak to a mortgage broker who will be able to provide you with the best self-build rates currently on the market.
With a self-build mortgage, unexpected costs can quickly mount up meaning you may have to borrow more than you initially planned. To keep debts down, ensure you plan for unexpected costs in your budget.