Building your own home could remain just a dream unless you manage to put your finances in order before starting the project. A self-build mortgage specialist is perhaps the only way to get the funds you need, but what is it, and how to access one? Find out how this type of mortgage works, which are its risks, and what to consider before applying.
What Is a Self-Build Mortgage?
A self-build mortgage is a specialist residential loan taken out on a property you are building yourself. What makes it different from a standard home mortgage is the way the funds are released into your account.
While lenders will give you a single lump of money for a standard mortgage, a self-build mortgage involves the gradual release of sums in instalments as your project develops. This system reduces the lender’s risk, helping them ensure the funds are spent as planned.
Typically, you will get the first instalment when you buy the land, a second tranche when you lay the foundation, and a further payment when the building is up to eaves level. The last two instalments are paid when the roof is watertight and upon completion, respectively.
Thanks to the gradual release of the funds, the lender not only minimises their risks but also manages your finances, so you won’t run out of money halfway through the project.
Types of Self-Build Mortgages
There are two types of self-build mortgages, the arrear type, and the advance type. If you access an arrear-type self-build mortgage, the payments are released after each stage has been completed. You are responsible for any upfront costs, such as the purchase of materials and paying the constructors.
Sometimes, this means you will have to access short-term loans to cover the shortfall.
If this is inconvenient and you don’t have a large amount of money of your own to invest, the advanced self-build mortgage could be a more suitable solution.
In this case, the lender releases the funds at the start of each stage rather than at the end. This means the money will be readily available in your bank account when you need them, giving you a bit more flexibility.
Obviously, the advantage of getting the funds in advance comes with pitfalls. In fact, the cost of borrowing is typically higher, and you may have to pay a premium policy too, which can have a high impact on your financial situation.
You should also know that only a few lenders offer this facility, so your options may be quite limited when scouring the market for the right financial product.
How Much Can You Borrow?
Regardless of how much money you need, a lender will unlikely grant a mortgage if it is deemed unaffordable. Different lenders use different criteria when deciding if and how much to borrow you but generally they grant up to 4.5 times the single income for a single mortgage application.
Joint mortgage applications benefit from other criteria; most lenders will grant up to 3.5 times the joint income, or up to 4.5 times the highest salary.
It is easy to understand though that each bank or building society will calculate your borrowing limits according to their own affordability criteria. In other words, even if a lender has rejected your application, another lender may approve it.
How Much Will It Cost You?
Before applying for a self-build mortgage, you should also consider costs. Only because a lender believes you could afford their mortgage and agrees to give you the money, doesn’t mean you should take them.
Interest rates on self-build mortgages could be as high as 7.5%, so if your net monthly disposable income doesn’t enable you to borrow funds based on this rate, you should wait until your financial situation changes.
What to Consider Before Applying?
The desire of building the home you’ve always dreamt of may push you to apply for a self-build mortgage. However, you should consider the following before contacting the lenders.
It’s common sense to approach a lender with a detailed plan of your intentions and incurring costs. You must know how much the land will cost you and what the fees associated with the purchase are, how much you’ll spend on project management and site preparation, construction design and planning consent.
Add a minimum of 20% to the estimates, then present your project to banks and building societies. Keep in mind that some lenders may require you to work on a fixed budget, while others may require a professional opinion regarding the costs.
Building your own home comes with adjacent costs, such as finding alternative accommodation until the project is complete.
Some options will have no impact on your affordability, but others may determine lenders to take a step back. If you plan to live in rented accommodation, for instance, the monthly rental payments may reduce your ability to pay the mortgage.
If you have no other solution, check if your lender will approve you to make upfront rental payments; some banks and building societies will recalculate your affordability if you pay all rent in advance prior to the commencement of the works.
While no lender will give you money if the construction method doesn’t comply with the current Building Regulations, some may reject your application if they don’t agree with the construction method you plan to employ or with the terms and conditions you agreed with your supplier.
Before committing to a payment schedule with your contractor, make sure the lender agrees with all the terms and signs a mortgage agreement.
With this in mind, you can now start your self-build mortgage hunting. Remember that banks and building societies are keen to lend money to residential construction projects. So, if you calculated all incurring costs and are certain of your affordability, there is truly nothing that can stand between you and the home of your dreams.
Take your Self Build Home from dream to reality. Secure the finances you will need with a Bridging Loan from the Money Hub.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.