Unlike a traditional mortgage for an existing property, funding your self-build project necessitates a different approach – the self-build mortgage.
What is a self-build mortgage?
The key difference between a standard residential mortgage and a self-build lies in how the funds are released. Instead of receiving a lump sum, a self-build mortgage disburses the money in stages, aligned with the construction phases. This reduces the lender's risk and ensures the funds are used as planned, mitigating the risk of running out of cash midway through the build or the borrower redirecting the funds.
Benefits of a self-build mortgage
So, now you’re aware of the function of a self-build mortgage, what are the benefits of taking one out to build your dream home?
Flexibility
You have more control over your budget and can adapt the build as needed within the agreed-upon specifications.
Tailored options
Depending on your specific needs, lenders offer various self-build mortgage products with features like interest-only payments during construction.
Potential cost savings
The price of construction or the value of the property, once the work is finished, are not subject to Stamp Duty. Duty is only due on the land's value, and even then, only if the cost is more than £125,000.
Drawbacks a self-build mortgage
Whilst the idea of building your dream home may seem ideal for you at first glance, it’s important to consider some of the possible drawbacks.
Higher interest rates
Compared to traditional mortgages, self-build mortgages typically have higher interest rates. This is due to the increased risk for the lender.
Eligibility requirements
You'll need to pass credit and affordability checks, and present a detailed project plan along with planning permission and building regulations approval.
Deposit requirements
Expect a larger deposit compared to a standard mortgage, often ranging from 30% to 40% of the build cost.
Mortgage advice
Consulting a mortgage adviser specialising in self-build mortgages is crucial to navigate the process smoothly and secure a good deal for your circumstances.
Building your own home is a complex but exciting undertaking. While a self-build mortgage can help you finance your dream, it's crucial to thoroughly research, seek professional advice, and meticulously plan to ensure a successful, and financially sound, project.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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