Self build mortgages help turn dream homes into realities. These customised borrowing agreements deliver financial support and resources as ambitious builders make homes for themselves. Mortgages aim to benefit both home builders and lenders alike, through structured asset distribution and creation. However, as a relatively uncommon and many-layered financial package, self build mortgages prove rarer than their standard mortgage counterparts.
The unique steps involved require dedication, organisation, and carefully calculated risks. However, when lenders and borrowers achieve a clear picture of these risks, they construct successful self build mortgages, and successfully self-built homes.
What are Self Build Mortgages?
People who wish to build a home, rather than buy one, often take out self build mortgages to finance their construction. This differs from a standard mortgage in two key ways: firstly, lenders lend on the prospective value of a future house, rather than an existing one. Secondly, the borrower cannot leverage the loan against the home itself, as it does not yet exist.
While this presents greater opportunities for both lenders and borrowers, it also presents new risks. If a build goes wrong, exceeds the budget, or encounters a paperwork issue, both the borrower and the lender could lose out. Lenders acknowledge these risks by charging slightly higher interest rates than on a standard mortgage. They often charge a higher rate on more expensive, ambitious, and risky builds. Some lenders also implement a minimum loan to value ratio on a self build project, lending between 70 and 80%. This aims to keep the project profitable for lenders and borrowers alike.
However, the main difference between standard and self build mortgages is the gradual release of funds at intervals during the project. Lenders release self build mortgage finance in stages throughout the construction process. Borrowers determine these stages with their mortgage advisors while applying for the loan.
What are the Different Types of Self Build Mortgages?
Self build mortgages dedicate separate portions of funds to be released around important landmarks in the construction process. The two types of self build mortgages, advance and arrears, release these portions before and after the landmarks respectively.
Advance mortgages, the less common form of self build loan, provide borrowers with funds before their construction landmarks arrive. This helps home builders without prior capital to kick-start their projects. These types of mortgages prove less common than the other form of loan, the arrears mortgage, as they present more risks for the lender.
Arrears mortgages, on the other hand, reward self builders with funds after each landmark. These mortgages suit borrowers with enough capital to begin the first stages of building on their own. They often require less collateral than advance mortgages. When self build mortgage applicants outline their financial circumstances and their plans with a mortgage advisor, both parties work together to decide on the type of loan, the size of each portion of the loan, and which construction landmarks to focus on.
How to Apply For a Self Build Mortgage
Self build mortgages offer creative and expansive potential. However, this makes preparation all the more important. The more planning and preparation that goes into a self build mortgage application, the smoother the project becomes.
Finding a Plot of Land
A choice plot of land proves essential for any successful self build project. Some borrowers find themselves lucky enough to inherit an ideal space for the construction. Others buy one with their own capital, or demolish a derelict building to create space for a new and improved home. Many lenders also make land mortgage deals available for those who wish to self build a property but lack the startup capital to buy a plot. These deals often require collateral assets, and may also affect the terms of any self build mortgage.
Of course, councils require planning permission before allowing new builds to progress. Lenders often require proof of planning permission before approving a self build mortgage, to ensure the build’s viability and the council’s green light. Some lenders only require Outline Planning Permission (OPP), with a rougher outline of the plot of land involved, and an idea of the building. Others prefer a Detailed Planning Permission (DPP) document, agreeing on the house’s specific dimensions and styles, to guarantee the build’s unique specifications.
Land and Ecology Surveying
While plots of land may seem ideal to the untrained and ambitious eye, lenders often require proof that a building site is appropriate for construction. Construction professionals categorise many urban or industrial plots as brownfields, or areas which may cause contamination or pollutants if developed. As opposed to greenfields, or previously undeveloped land, brownfields require thorough hazard assessment. Greenfield sites, however, often require ecology reports to determine which plants and animals live in the area, and how to account for them during the self build project.
Detailed Project Costings
Thorough project costing plans help reassure self build mortgage lenders and borrowers alike. Before embarking on a project as big as a self build, borrowers should strive to achieve a meticulous and accurate account of each cost involved, from construction materials to labour, to consultancy fees. Selecting professional workers for the project, including the architect and the construction workers, and bringing their quotes to a self build mortgage plan gives estimates a concrete foundation.
Mortgage applicants often select a qualified quantity surveyor to conduct or support this task. Factoring in a contingency budget, for emergencies and unexpected extra costs, also proves essential to many self build mortgage applications.
Employee Warranties and Insurance
Construction professionals usually require professional indemnity cover on their architects. This, among other forms of insurance and indemnity, supports self build mortgage applicants into their dream homes. Many use employer’s liability insurance and contracts work insurance, to make sure their projects go to plan, and to cover themselves in case of errors or emergencies. When applicants reinforce their ambitions with planning and precautions, self build mortgage landmarks follow, and homes develop.
Self Build Mortgage Landmarks
Many lenders use the planning permission agreement as the first landmark to release funds during self build mortgages. Mortgage advisors suit each portion of finances to each milestone.
Following the planning permission, other common finance landmarks include completion of the foundations, completions of the walls, completion and waterproofing of the roof, and the first and second fix. The first fix refers to plastering in the home, while the second fix concerns utilities such as wiring, heating, and plumbing. Around the final stage, certification, lenders release the last of the mortgage, and the home is complete.
The Benefits of Building it Yourself
While self build mortgages do incur some risks, especially when not properly planned, they also bring unique benefits. Dream homes deliver themselves to successful self builders as the project’s main benefit. Besides the sentimental value, property also develops significant financial value. Self builders access other financial benefits designed to incentivise new buildings, such as avoiding stamp duty and VAT on construction. Builders avoid stamp duty on projects valued under £125,000 and can also reclaim the VAT for the work.
Self builders should therefore keep a tight track of all their receipts and paperwork to unlock these benefits as construction progresses.
Self builds work best when prospective home-makers discuss these benefits, and the accompanying concerns, with a reliable mortgage advisor. Working together, borrowers, advisors, and lenders collaborate to create healthy, wealthy homes.