> Self Build Mortgage - UK Guide
In a nutshell
A mortgage that can be used to build a new property or to convert/renovate an existing property.
Best Mortgage For
Anybody looking to build their own home or to convert/renovate an existing property.
You'll find all the standard products and deals on offer here - i.e. repayment or interest only mortgages, fixed, capped and discounted rates, variable and tracker options. Deals will usually be set up to last for between 1-5 years - at which point you'll be expected to revert to the underlying base product such as a variable or tracker mortgage. Self build mortgages are different from standard products as they are not all paid out at once. You'll generally have the money paid out in stages - either as an arrears mortgage when each stage is completed or in advance of any work being done.
Typical Amount to borrow
Borrowing amounts vary from lender to lender and may depend on the scope of your project, If your income is used as a borrowing base then you can currently expect to borrow between 3-4 times a single salary and 2.5-3 times joint salaries - some lender will be more flexible than this. Some lenders will set a cap on your borrowings for the project and some will allow you to cover over-run costs.
Lenders have different ways of working out how much they will actually lend you. Some will base their decision on the estimated value of the completed property and some on your actual land and building costs. For example, certain lenders will allow you to pay a 5% deposit on land and build costs. Some won't even look at letting you have a mortgage for land purchase so you may need to go to a specialist lender for this or fund the purchase costs yourself.
Self builds are a lot cheaper than buying a pre-built property and suit many people because they can effectively design their own home and potentially afford to live in areas where an outright property purchase would cost too much. You can also see savings in certain costs such as stamp duty. And, if you find a flexible self build mortgage you can also take payment holidays - this can be especially useful if you have to pay two mortgages while your work is being done.
What to look out for
You should obviously be budgeting carefully with a self build as you will invariably find that you have unforeseen expenses and delays to cope with. For this reason alone, it's wise to take expert advice - many lenders will have the experience to help you work out a budget here. Industry experts generally recommend adding a cushion of additional funds to cover any over-runs on costs etc. A self build will also cost you extra costs that you might not have thought of. These can include planning application costs, insurance costs (you'll have to take out site insurance for the duration of the build) and, in certain cases, assessment costs. If you take up an arrears mortgage then your lender will not pay up the mortgage stage until they have had the work checked - each check will potentially cost you an additional fee. In some cases, lenders also specify that you must have someone oversee the build - and you'll also have to pay for that. Self build mortgages are not as common as standard mortgages and you may find that you have less choice and fewer options here. You'll also be expected to do a lot of the planning and design work (which may also cost you extra) before you can make a mortgage application. And, you need to be aware that many standard lenders will not let you take a mortgage out for the land you need to buy so you may have to raise this cash yourself or through a specialist provider. Many people forget about the fact that they will have to juggle their self build mortgage costs with the costs of their current living arrangements - this can often mean having to pay two mortgages or rent and your self build mortgage. As a self build can often take longer than you planned it's essential to make sure you can afford both of these costs for the short to medium term. A flexible mortgage that allows payment holidays (as mentioned above) can help here. If you take out an 'arrears' based self build mortgage then you may find yourself liable for upfront costs before your lender hands over the staged payments. This may mean that you can't pay contractors immediately if you need to wait for the lender assessment before you are given your cash. It's wise to make your contractors aware of this fact.
If you're looking to self build, then this type of mortgage is probably your best option. If you have built up significant equity in your current property, then you may also want to look at an equity release product to cover some of the costs.