Self-build mortgages: what you need to know

You may need a self-build mortgage if you plan to design and develop your own home.

Unlike a conventional mortgage, if you get a self-build mortgage the lender pays you money to fund the construction of your home. Payments are typically made in five or six installments.

We outline how self-build mortgages work, the different types available, and some of the pros and cons of getting one.

Below we explain:

• What is a self-build mortgage?
• What types of self-build mortgages are available?
• What are the pros and cons of a self-build mortgage?
• Is it hard to get a self-build mortgage?
• How do I find a self-build mortgage?

Ready to get a mortgage? Our mortgage comparison tool can help you find the best deal.

What is a self-build mortgage?

Self-build mortgages are for people who want to design and build their own home.

By securing this type of mortgage you are given money by the lender to fund costs relating to the building work, such as materials, equipment and labour.

Just 7% of homes in the UK are self-built, and the government is actively encouraging more people to take part after unveiling the Help to Build scheme in April 2021.

The aim of the £150 million government scheme is to make it easier financially for people to build their own homes through mortgages that require smaller deposits.

What types of self-build mortgages are available?

If you have found a plot of land where you would like to put up a home, the next stage is to finance the build – and many people will rely on a mortgage for this.

Money is released in stages with a self-build mortgage – either in advance or in arrears, as we explain below. 

Funds are released as a percentage of what the project is worth at that time, typically between 60% and 85%. You would probably have to fund the remaining amount through your own savings in the same way you would provide a deposit for a conventional mortgage.

The lender usually appoints a professional to assess the value of the build at each stage of the project.

Here are two common types of self-build mortgage which we outline below.

Arrears-stage payment mortgage

This is the most common type of self-build mortgage.

Money is provided to help with the purchase of land, with further payments released after each stage of the build is complete. This is after a valuer has assessed the work carried out so far.

From a lender’s perspective, it ensures they are not advancing more than the home is worth, so it reduces the risk of them losing money. It also reduces the danger of the build being abandoned before it’s finished.

Borrowers going down this route will need to rely on their own funds to pay for materials and labour upfront.

Advance-stage payment mortgage

Payments are released at the start of each build stage, before work goes ahead.

The funds are agreed in advance, based on the borrower’s projected build costs and are guaranteed irrespective of any valuations carried out by the lender. This means that you know what money you will receive at each stage. 

But this option involves greater cost diligence at the start of the project and detailed projections of what each stage will cost.

What are the pros and cons of a self-build mortgage?

Pros:

• You can build your ideal home, and without needing to fund all the work from savings.
• After the build is complete, you can gain access to a wider range of mortgages by remortgaging.
• The government’s Help to Build scheme may give borrowers the choice of better mortgage deals when it is launched.
• You may avoid stamp duty, as buyers only pay the duty when buying the land – and not on the completed property. Stamp duty is not charged on land costing less than £125,000.

Cons:

• A self-build mortgage will typically come with a higher interest rate than conventional mortgages. 
• The deposit required is typically higher – ideally, you will put down a 25% deposit.
• There will be more paperwork, and you will have to satisfy your lender at each stage of the construction process.

Is it hard to get a self-build mortgage?

Self-build mortgages are typically offered by smaller lenders rather than the mainstream lenders.

This means interest rates are likely to be higher than on conventional mortgage products. Borrowers should also expect to put down a higher deposit than if they were buying a home that already exists.

It means first-time buyers, young people and, in general, those without substantial savings may find it more difficult to get access to these mortgages. 

However, the government’s Help to Build scheme aims to help overcome these obstacles by reducing the amount that aspiring homeowners need to pay upfront. 

Similar to the Help to Buy scheme, Help to Build allows you to take out an equity loan from the government. This can be put towards your deposit, reducing the amount you have to borrow.

This means you are likely to have a greater choice of lenders and access to better interest rates. 

Do I need a deposit for a self-build mortgage?

Just like a conventional home loan, you will need a deposit for a self-build mortgage. 

But how much deposit do I need for a self-build mortgage?

The amount varies depending on the lender. But as a general rule, you should ideally have a deposit of at least 25% of the total project value.

The government’s Help to Build scheme could help you reach a higher deposit than you would get otherwise.

It works like the Help to Buy equity loan scheme, in that borrowers may only need a 5% deposit – with the government providing a loan to boost the overall deposit amount to 25% of the expected build cost.

How much can I borrow with a self-build mortgage?

This depends on the lender’s lending criteria and on the borrower’s personal circumstances. The National Custom and Self Build Association (NaCSBA) has details of accredited mortgage brokers.

Before applying for a self-build mortgage, it could be worth speaking to a specialist broker.

They can advise how much you may be able to borrow and where to find some of the best deals for your circumstances.

What do lenders want to know about the project?

When applying for a self-build mortgage, you will need to provide as many details as you can about the project.

This may include:

• Evidence of planning permission or listed-building consent.
• Details on the size and scale of the property you intend to build.
• A projection of costs across all the build stages.

How do I find a self-build mortgage?

If you are considering building your own property, a useful resource is the government-backed Self Build Portal. Here you can find independent advice and information relating to all aspects of self-building – including access to finance.

You may find there are lenders that offer competitive rates for borrowers who match certain criteria. For example, Ecology Building Society offers a discount on its mortgage interest rates for borrowers building an energy-efficient home.

Rates from self-build mortgage lenders are typically a lot higher than conventional mortgage products, according to broker Mortgage Key.

However, you should be able to remortgage once the build is complete, and you can then search for a cheaper rate. This is because the house will likely be fit for residential use, and there is less risk involved for lenders.

Find out more: Is now a good time to buy a house?

Can I get a self-build mortgage on land that’s already owned?

If you already own the land, you can still take out a self-build mortgage – it just means you will probably need to borrow less.

You may have to pay some stamp duty if the property you are building will not replace your main residence.

However, be aware that many lenders will only release money after each build stage has been completed. So you may need to rely on your own savings to get each phase of the development under way. 

If you are low on funds, you could look to remortgage the land through a self-build lender.

This would raise the money needed to fund the initial stages of the build, with further funding released as the development progresses.

What about mortgages for a barn conversion?

A self-build mortgage is likely to be needed if you are looking to convert a barn, or any other major building.

If you are looking to sell the barn or let it out once it has been developed, then you might need to look at development finance rather than a mortgage.

Development finance a short-term funding option to help with renovation costs. The loan is usually repaid within two years.

Here are seven tips to help you get a mortgage.

What about mortgages for non-standard construction properties?

A non-standard construction mortgage may be required for any property that is not made from the typical brick or stone. This is because you may find it difficult to obtain finance from mainstream lenders. 

If you are looking to renovate a concrete house with the help of a mortgage, may be worth speaking to a specialist broker as many lenders are wary of these types of property.

This is because of concerns over structural issues.