How do self-build mortgages work?
A self-build mortgage releases funds in stages rather than all at once. A typical run of stages is the land purchase, foundations, wall plate (the point where the walls reach roof height), roofing, first fix (plumbing, electrics, and plastering), and second fix (the finishing work). Before releasing money for each stage, the lender sends a surveyor to check on progress.
There are two main ways the money comes through. With arrears stage payments, the lender pays out after a stage is finished, so you have to fund the work upfront and claim it back. With advance stage payments, the money arrives at the start of each stage, which gives you the cash to pay for materials and labour as you go.
Advance stage payments need less of your own money upfront, but fewer lenders offer them and the interest rate can be a little higher. Your broker can help you pick the right structure based on how much cash you have to hand and how the build is timed.
What do lenders require for a self-build mortgage?
Lenders want detailed architectural plans, full planning permission (or at least outline permission, which is initial agreement in principle before the detail is signed off), a full breakdown of build costs, and proof that you can manage the project. Many will ask you to work with a qualified project manager or main contractor rather than running the whole build yourself.
You will usually need a deposit of at least 25% of the total project cost, which is the land plus the build costs. A few specialist lenders take less, but the more you can put in, the better the rates you can reach.
The lender also runs a standard affordability check on your income and existing commitments, the same as it would for any mortgage. What is different here is that it also weighs up whether the project is viable and what the finished home is likely to be worth.
Costs involved in a self-build
On top of the land and construction, budget for professional fees: an architect, a structural engineer, and the planning application. You will also need building regulations approval, site insurance, and a warranty (structural cover on the finished home) from a provider such as NHBC or CRL. Your mortgage lender will normally insist on these.
A contingency fund is not optional. Most advisers suggest putting aside 10-15% of the total build cost for the things you cannot predict. Self-builds often throw up surprises, whether that is difficult ground conditions, a jump in material prices, or a change to the design partway through, and each one adds to the bill.
VAT on a new build can be reclaimed through HMRC’s DIY Housebuilders Scheme, which can add up to a real saving. Keep every invoice and receipt as you go, because you will need them to make your claim, and you have to submit it within three months of the build being finished.
Moving to a standard mortgage after completion
Once the build is finished, you can remortgage onto a standard residential mortgage. That often makes sense: self-build rates tend to sit higher than standard ones, and the completed home may be worth a good deal more than it cost to build. A higher value against the same loan means a lower loan-to-value (the size of your mortgage set against the property’s value), which opens the door to better deals.
Your broker can plan for this switch from the very start, making sure the self-build mortgage has no heavy early repayment charges and lining up the move to land with completion and the final valuation.