It’s now possible to get a mortgage to finance a self-build home in just the same way as you would for a pre-built home, and there are even specialist companies to help you do just this.
As you navigate your way through your building project, you need an experienced professional looking after the finance side of things. Finding an expert in this particular field is a good first step, because there are some key distinctions between the traditional mortgage and a self-build mortgage.
Stages
The first main difference is in your preparation. As you approach the mortgage application process, you’ll need to make a very detailed plan which outlines how you will see the project through from start to finish. Lenders want to see that you have a clear and managed process in place to get the project completed for the budget you’ve allocated.
This will normally be broken down into stage which could look something like this:
- Buying your land
- Footings and foundations
- Wall or frame construction
- Roof construction
- Weatherproofing
- Internal plastering and final completion
The stages can vary from lender to lender, and a wooden or steel frame structure is likely to have slightly different stages than a traditional stone or brick built house.
Borrowing amount and cost
When it comes to the budget, you can generally borrow up to 75% of the costs of either the land, end value, or both.
However, there are some lenders who can lend you up to 90% of the cost of the land and / or the build.
Self-build mortgages are usually more expensive than standard mortgages in terms of the interest you’ll be charged, but they could end up being cheaper overall because you’ll usually need to borrow less in the first place than you would for a pre-built house.
You’ll need to present very detailed plans outlining what you intend to spend at what point during the build before you can get your mortgage approved.
Advance or arrears
The way your money is released can vary from lender to lender, but the style of mortgage falls into two main camps. Either your money is released in advance, or it’s released in arrears.
In either case, this is still likely to be in stages, but the difference is that the money to finance a stage is either released before the stage begins, or after it’s been completed.
You might want to choose an arrears option if you have savings or you already have the land you need to build on, giving you upfront funds to finance the early stages of your self-build.
Inspections
As part of the agreement between you and your lender, you’ll most likely find that they’ll want to come out and inspect the build progress at the end of every stage.
This is usually necessary so that the money can be retrospectively released for each stage, if you’ve selected an arrears mortgage, or in advance of the next stage.
In addition, most lenders will expect you to bring in professional builders, rather than build the house yourself – unless you have extensive experience.
As it’s more of a gamble for the lender than loaning you the money to buy a pre-existing house, so you’ll find they want to check and verify as much of the project as they can, both beforehand and during the build itself.
Contingency budget
No matter how much you want to borrow, it’s always a good idea to build in a 10% additional amount just in case.
Building projects go over time and over budget on a regular basis, and if that project is your own home then you’ll need to do what you can to make sure it gets finished.
By borrowing a bit more than you need, you know you’ll be covered if you hit an unexpected cost or a delay that could be moved along with a bit more cash.