If you are keen to build your own dream home, then a conventional mortgage will not serve your needs. Instead, you will need to apply for one of the specialist self-build mortgages offered by certain lenders.
Guide to self build mortgages
Many of us dream of building our own home so that it is exactly the way we want it, but before you get carried away with your dreams the first thing you need to work out is how to finance the build.
If you are planning to embark on a self-build, you can either opt for the DIY route, where you do most of the work yourself, and use professionals like electricians or plumbers where necessary, or you can manage the process and employ a surveyor, an architect and tradesmen who do all the work on your behalf. Alternatively, you can arrange for a contractor to manage the whole project for you.
Whichever route you choose, you won’t be able to get a standard residential mortgage, so you’ll need to apply for a self-build mortgage unless you’re fortunate enough to have the cash sitting in the bank.
Here, we explain how self-build mortgages work, and what to watch out for…
As the name suggests, a self-build mortgage is a home loan take out on a property which you are building yourself.
The biggest difference between self-build mortgages and standard residential mortgages is that the funds are given to you in stages rather than as a single lump sum. This is to reduce the lender’s risk and ensure that the money is spent as planned so you don’t run out when you are only half way through the project.
Exactly when fund are released will depend on the lender but, as a general rule, you’ll get the first tranche when you buy the land, more when the foundations are laid and a further payment when the property is built up to eaves level.
The final payments will be made when the roof is watertight and then when the interior walls are plastered, and the last instalment is paid on completion.
One of the advantages of building your own home using a self-build mortgage is that you could save yourself thousands of pounds in stamp duty. This is because you there is no stamp duty on the cost of the building work, or the value of the property once the work has been completed. You only have to pay duty on the cost of the plot of land itself if the cost exceeds £125,000.
The potential financial gains from building your own home are another advantage. Often self-builders find their finished property is worth much more than it cost them to construct.
There is likely to be more paperwork involved when you take out a self-build mortgage compared to a standard residential mortgage, as you will have to produce detailed plans for the property. You will also have to provide a projection of the costs involved and most lenders will also want to see that planning permission has been granted.
As a general rule, you will need to put down a deposit of at least 25%, although you might be required to put down as much as 50%. Remember that on top of this deposit, you will need to pay for alternative accommodation while your new property is being built.
With most self-build mortgages, the money for each stage is usually only paid out once it has been completed and a valuer has visited the site.
However, some self-build mortgages release the money required for each stage of the build at the beginning rather than the end of the stage. This is particularly useful if you don’t have the cash up front to pay your builders or to buy materials.
Rates on self-build mortgages tend to be higher than on standard mortgages, so it is our job at the Cornwall Mortgage centre to get you the very best deal.