For many, the idea of creating their dream home is very appealing, be it beach front or urban jungle and all in between. However, financing a project of this kind needs special attention. That’s where self-build mortgages come in.
Understanding Self-Build Mortgages
Traditional mortgages work well for buying homes that are already built. However, a traditional mortgage will not meet your needs project you are planning your own Grand Design. Self-build mortgages are specific products designed for the step-by-step process of building a home from the ground up, or completing a significant refurbishment.
Defining Self-Build Mortgages: How They Work
A self-build mortgage is a special kind of mortgage that helps clients fund the building works associated with building property. Unlike regular mortgages, which give you all the money at once, self-build mortgages release money in stages or ‘drawdowns’. This means you get funds in smaller amounts as your building project progresses.
These drawdowns usually match key stages of construction. For example, finishing the foundation, putting up the wall frames and adding essential services. This type of financing ensures that clients are supported with money at the right times rather than spending the full loan balance in one go. This type of funding helps to reduce interest payments during the building works and prevents overspending at the beginning of the project.
Self-Build vs Traditional Mortgages
Both types of mortgages help people buy a home, but they work quite differently. Traditional mortgages are for homes that already exist. They give you one lump sum payment to complete the purchase. On the other hand, self-build mortgages focus on the special needs of building a new home from scratch by providing the loan in tranches, which are supervised by a surveyor.
Additionally, traditional mortgage interest rates usually apply to the whole loan amount from the start. With self-build mortgages, interest is charged only on the money taken out at each stage. In some cases, clients may even save some interest during the project!
Here’s a simple comparison:
- Traditional Mortgages: One lump sum used for existing homes, with the interest on the total loan amount from the start.
- Self-Build Mortgages: Payments are given in stages. The product is specifically made for new builds and interest is often only on the amount used.
Planning Your Dream Home Project
When you choose to start a self-build project, careful planning is very important. Before you talk to lenders, you need a clear budget. This budget should cover everything about the project including the build costs, land cost, any professional fees and some extra money for unexpected expenses.
Budgeting for Your Self-Build Project
A realistic budget is key to a successful self-build project. Start by including the cost of the plot of land. Keep in mind that land without planning permission may seem cheaper at first but can lead to extra costs. After you have considered these costs for getting the land for your new home, think about the build costs.
Get quotes from different builders and suppliers. Make sure they match your chosen construction methods and materials. Detailed plans are very important. They show your vision clearly to builders, helping them give accurate cost estimates, and don’t forget to include professional fees for architects, structural engineers, and planning consultants.
Add a backup fund of at least 10-20% of the total cost. This will help with unexpected expenses during the build. Careful budgeting reduces financial surprises and helps make the construction process smoother.
Self-Build Property Lending
Getting Started with Self-Build Mortgages
With a good plan, you can begin to look at your self-build mortgage options. Due to their specialist nature, not all lenders provide self-build mortgage products. Working with a mortgage adviser who knows about self-build finance can be really useful for clients exploring their lending options.
Criteria for Eligibility: Are You Qualified?
Before you consider applying for a self-build mortgage, it’s important to know what lenders look for in order to boost your chances of getting approved. Each lender has their own rules, but here are some common factors they consider:
- Credit History: Having a good credit score shows you handle money well. This makes you a better borrower.
- Income and Affordability: Lenders will check your income. This helps them see if you can afford your monthly mortgage payments.
- Deposit Size: The deposit you can put down affects the loan-to-value ratio and the interest rates they may give you.
- Project Viability: Lenders will review your building plans, costs, and the skill level of your building team to make sure your project can succeed.
- Experience: Some lenders might want to see that you have owned a home before or have experience with complicated projects.
How Much Can You Borrow?
The amount you can borrow with a self-build mortgage varies based on your financial profile, your chosen lender and the amount of deposit you have available. Lenders typically consider factors like your income, expenses, credit history, and the estimated value of your completed home.
While some lenders base borrowing limits on a multiple of your income, others may consider the projected value of your finished house. Typically, you can expect to borrow up to 80% of the total project cost, including land purchase and build costs.
Can I Apply for a Self-Build Mortgage with a Low Deposit?
Whilst some self-build mortgage lenders offer competitive financing solutions to low deposit offers, it’s always better to try and increase how much you are willing to use. A larger deposit will reduce the risk for lenders as less loan to value is required, and may help to reduce the interest rate to something more aligned to market leading rates.
What Is the Typical Interest Rate for Self-Build Mortgages?
Interest rates can change depending on market conditions and personal situations. The rates from self-build mortgage lenders are typically higher than standard mortgage rates due to their riskier nature.
Navigating the Application Process
Preparing a complete self-build mortgage application is very important for a smooth and successful result. Collecting the right documents ahead of time makes things easier. It allows you to give the lender all the details they need to check your application properly.
- Detailed Plans and Costings: You need clear architectural drawings, details, and a list of all expected build costs. This helps lenders see if the project is possible.
- Planning Permission: You need proof of planning permission for your project, including any rules or limits.
- Proof of Land Ownership (if applicable): If you already own your land, provide proof of this ownership.
- Building Contract: Have a signed contract with your builder. This should detail the work and the payment plan.
After Approval: Managing Your Self-Build Mortgage
Once approved, the fun can begin with starting to build your dream home! It’s important to know about the drawdown process so keep in touch with your lender during the construction. This will help make the experience smooth and enjoyable.
Fund Release Stages and Monitoring Progress
The main feature of a self-build mortgage is the staged release of funds. When your project starts, your lender will give you money at agreed milestones. This helps you have enough cash flow to pay for materials and labour as your project moves forward.
An independent surveyor usually checks the work at each stage to confirm the progress before they release more funds. The number and timing of these checks can change based on your lender and how complex your project is.
To avoid delays, keep careful records of all your costs, invoices, and receipts for the build. Let your lender know about the project’s progress regularly. Answer any questions or concerns quickly.
Transitioning to a Standard Mortgage Post-Completion
Once your dream home is ready, it’s time to refinance your self-build mortgage. Many lenders make it easy to switch to their standard residential mortgage offerings at the point of refinance, or you can approach other lenders for a remortgage.
When refinancing to a residential mortgage, think about the loan amount, the loan term, whether you want fixed or variable interest rates, and any other fees that may apply. This is a great time to look at your finances again and pick a mortgage that fits your long-term goals.
Keen to see how LDN Finance has sourced self-build mortgages for clients previously? Check out our case studies that sees our team secure an interest-only self-build mortgage for one client, and a separate self-build mortgage for a client looking to carry out extensive refurbishment works.
Contact LDN Finance for more information about financing a self-build property, and get started today.