Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
Straightforward mortgage advice from expert brokers. Finding the perfect mortgage just for you without the jargon.
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Adam Messer talks us through a self-build mortgage.
What is a self-build mortgage and how do they work?
I like self-build mortgages – they’re always interesting and I love to see the projects people are doing. A self-build mortgage is a way of borrowing money to build your own home. It’s much like any other regular mortgage, but it just works slightly differently, in that it gives you money as you build your house.
You tend to get a bit of money at the start to buy some land, and then more money each time you get to the next stage of the build. Once you have a finished house at the end, it’s a normal mortgage – you will either maintain that mortgage for a while or repay it and take a standard mortgage out.
What types of self-build mortgages are available?
Typically you can have a fixed rate deal, or some people might prefer a variable rate or tracker. If it’s fixed for a certain period of time, that will generally be the time that you’re building the house.
You normally get a year or two for the build. You can also have an interest only loan whilst you’re building, so that it’s not a massive monthly payment. That’s useful for a lot of people – then once it’s finished you can turn it into a repayment mortgage.
Obviously, that’s not for everyone but most people want to repay that mortgage over time.
In the early stages it can be helpful to have smaller payments when you’re building and you have other money going out on all the other expenses. A fixed rate isn’t the best for everyone either, so we always make recommendations once we know all the facts.
What are the lending criteria for a self-build mortgage?
Lots of things go into lending criteria. If we think first about the person applying, lenders are going to look at your income and how much you can afford to pay back.
That’s based on income, outgoings, whether you’re employed or self-employed and how you get paid. We’re also going to factor in how old you are and how long you can take a mortgage for – that’s like any other normal mortgage.
Then it’s about the type of property. Some lenders like certain types of builds that others don’t. You might be doing a barn conversion, or building a traditional house in a field or a terraced property wedged in between two others. It could be containers stacked on top of each other, or one of those flat pack houses that come from the continent on the back of a lorry and go up in two minutes.
Lenders will want to know the details – will it have a timber frame, steel, or traditional brickwork? What’s the roof going to be? Generally, whatever you’re building there’ll be a lender for it, but sometimes it just takes a little bit of finding.
Do I need a deposit for a self-build mortgage, and if so, how much?
Yes, you need a deposit but probably not as much as most people think. You can get a mortgage with 15% or 20% of the total cost – the land and then the cost of the build as you go through.
Let’s say your land is £500,000 and you need another £500,000 for the build cost. Or you might get land for £200,000 and build a modest house for £200,000 – so a deposit of 15-20% of that £400,000 will be fine.
For a more weird and wonderful house, lenders might want a slightly larger deposit. But if it’s fairly traditional with standard construction, a 15% or 20% deposit is fine.
How much can I borrow on a self-build mortgage?
It’s very much like any other normal mortgage. Lenders are going to work out what your income is and what your outgoings are. They’re going to do a calculation on how much you can afford based on repaying that mortgage over a certain period of time.
You can’t particularly borrow any more for a self-build mortgage than on a standard mortgage.
Do you need to deposit for a self-build mortgage if you own the land?
No, if you already own the land you don’t need a deposit. Maybe you’ve been given it, inherited it or separated it off from the plot next door to you. That land’s already got a value, so the lender can secure the finance on it.
It can get slightly complicated, because it depends on the lender and how they release the money. They release the money in stages, but with some it’s upfront and with others it’s after each stage has completed. If you already own the land, we could go to a lender for some money to get started, secured on the land.
It’s important to point out that self-build mortgages are not necessarily a development project – we’ve talked about development finance [add link] on another podcast. So check that out because it works in a slightly different way, with the aim to build a property to sell on or rent out. What we’re talking about here is very much building your own property to live in.
Can you get a mortgage to build a house if you own the land? Can I borrow money on a piece of land I own?
If you already own it then great, we just covered that. If you don’t already own it, to get a self-build mortgage the land needs to have planning permission. The lender needs to know that you can sort of start building the property fairly quickly.
If you want to buy some land that hasn’t got planning permission, you can do that, but you need something in between that and your self-build mortgage. If you’ve got the cash to buy the land, then obviously that’s fine.
If not, we’re going to need a bridging loan or something similar to buy the land before you’ve got the planning permission. We’ve talked about bridging loans [add link] on a previous podcast. It’s slightly more risky, because obviously you’re buying land and hoping to get planning permission – if you don’t get the planning then you’re stuck with a piece of land with probably quite expensive finance on it.
You can finance land that doesn’t have planning on it, but you’re going to need a bigger deposit – perhaps 50%. Once it’s got planning we can convert it to a self-build mortgage and recoup some of the money.
Is it hard to get a mortgage for a self build?
No – it’s no harder to get than any other mortgage, but there are a few more hoops to jump through with the plot, plans, permission and project costs.
But in terms of actually securing the finance, as long as your credit score and your income are okay, then it’s no more difficult than any other mortgage.
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Do mortgages for a barn conversion work any differently?
It’s similar. Generally, you’re going to need planning permission – if not, we need to fund the purchase in some other way. Some barns come with ‘Class Q’ planning where you can convert an agricultural building into a home.
Those big framed barns with open spaces can be converted quite easily if they were originally used for certain things and they aren’t a conservation area. Class Q planning means you don’t need to go through such a detailed planning application.
But yes, you can get a mortgage for a barn conversion with planning consent. It works in a very similar way – you’ll get a bit of money to buy it and then more funds in stages as the conversion goes on. Not all lenders will like barn conversion mortgages, but some are fine with them.
What about mortgages for non-standard construction properties?
It depends what you’re building. A traditional brick-built house is one thing – but if you’re bringing in a prefabricated home from Germany, or you’re having a house built of straw as I’ve seen on Grand Designs, it will be more difficult.
Could we get a mortgage on a house made of straw? Well, maybe, there’ll probably be a specialist for that. You can get a mortgage on anything if you’re prepared to pay for it.
As long as it’s a house with its own legal title, banks will pretty much lend on it. You’d probably be surprised what lenders consider standard and non-standard. Some property types might not be overly mortgageable for many lenders. But there might be someone for it – we just have to see.
What is an alternative to a self-build mortgage?
Obviously, if you’ve got the money to just build it, then great. You could do a bridging loan if you’ve got the money to, or perhaps you’ve got some of the money but need a bit more – perhaps you can build or convert something yourself and then remortgage afterwards.
We see the odd person with that sort of thing. But a self-build mortgage is quite specific – there’s not really any clear alternative.
Are self-build mortgages more expensive than buying a property that’s already built?
The cost of the property is probably going to be a bit less, if you can find the land at a reasonable price. The cost of building has gone up in the last few years, but you would still usually finish up with a house that costs less than it would to go and buy that standard of property.
With the finance itself, you’re probably going to pay a higher rate on a self-build mortgage than you would on a traditional one. But once the house is finished, you can just remortgage it somewhere else.
Self build is a very specific product and whenever anything is specialist it comes at a slight premium.
How much does a self-build mortgage cost?
Let’s assume for a moment that you’re choosing interest-only whilst you’re building. All you’re going to be paying is the interest. Because the mortgage is released in stages, you’re only going to pay for what you’ve borrowed.
Every few months you will get an extra chunk of money, and you’ll pay interest on the amount you’ve taken out. At the end, once they’ve released the full total, you’re paying interest on the whole lot. You’ll have an annual interest rate like a standard mortgage and pay the monthly interest on that. Once the build is finished we can swap you to repayment.
What else should I think about before taking out a self-build mortgage?
You need to be prepared for things to go wrong – because they will. You only need to watch Grand Designs to know that it’s always going to cost more than you think. Stuff’s going to happen along the way.
But for the most part, it’s a fun journey. I’ve not done it but I would like to – although I’m not sure my wife would! You just need to think about having a contingency fund and having various experts along the way.
You might project manage it yourself, but the lender would probably prefer that someone who knows what they’re doing is overseeing things. Those people are expensive – architects, project managers, builders… so you have to be prepared for those costs.
It’s also quite expensive to get planning. So if you’re looking at something that hasn’t got planning permission, consultants, architects, surveys, searches and reports all cost money.
But hopefully with enough preparation, planning and the right experts on the case, not too much will go wrong.
What are the pros and cons of a self-build mortgage?
The main pro is that you end up with a house that you’ve designed yourself. It’s for you. It’s where you want it and exactly what you want to be. It’s probably cost you slightly less than it would to buy it – if you even could. That’s the dream, and a lot of people have that dream.
In terms of the cons – it’s probably going to cost more than you think. Things will go wrong at some point and you need to be prepared for that.
How do I find a self-build mortgage?
Just speak to us – we will find one for you. We’ll look at what you’re doing and your plans, the land, the property, the build, the costs and we’ll go and find the best lender.
We have access to several lenders that do that, but we also know more specialist ones that you can’t access yourself. We know exactly where to start and where to go. Let us help, because trying to get this information online is very complicated. So speak to someone who can do it right from the start.
Your home may be repossessed if you do not keep up with your mortgage repayments.