Everyone is pretty familiar with how a standard mortgage works, however with a self-build mortgage it is not quite so simple as you will not have built the house to borrow against. The good news is that it is still possible to get a self build mortgage.
We cover the different types of self build mortgage and their relative costs in our project all about funding your self-build. But what is a self-build mortgage?
How Self-Build Mortgages Work
As you have no house as such to borrow against a self build mortgage has to work a little differently to a normal mortgage. With a normal mortgage, you are lent money against the value of the house up to a certain percentage (known as the LTV or Loan to Value rate), typically determined by your level of risk. This risk reflects your likelihood of actually being able to pay it back, and the likelihood that the property will not lose value, and it also determines the ‘cost’ of the mortgage; the rate of interest you will have to pay and any fees.
Immediately you can see that if there is a house (that can be sold) in case something goes wrong – ie, you don’t keep paying your repayments – then the mortgage company can sell your house to recover their money.
What happens if there is no house to sell?
To get over the “Chicken or Egg” problem of lending you money to build your self-build house when there isn’t a house there to lend against, there are some lenders who specialise in Self-Build Mortgages.
A self-build mortgage releases money in staged payments as you need them to fund your build, and roughly in line with the value that you are adding to the plot as your house gets built and nears completion. Typically the money is release as you get to the end of each stage as agreed with your mortgage company. This means that you will have money for the next stage, and so no until you complete the build. There are variations on this, so have a look at when payments can be made for different types of self build mortgage here.
Things to Remember About Self-build Mortgages
As they are a little different there are a few things that you need to bear in mind about them. Firstly, just like any mortgage your home will be at risk of repossession if you fail to make the payments, even if it not finished.
Self-build mortgages tend to be a little more expensive that normal mortgages as it is going to be a little more risky lending money to someone that hasn’t built the house yet; more could go wrong. The fees and interest rates will be a little higher, so if you already have a house you should think about selling it or mortgaging it to fund your build.
Once you’ve completed the build, in many cases, you can convert the self-build mortgage into a normal one. This is worth doing as you can reduce your repayments so check that you will be allowed to before you enter into your agreement.
Getting a self-build mortgage can be challenging because you will have to demonstrate that you have a good plan for your build and are on top of the finances. You have to show then that you have got everything covered, including their repayments as the build progresses.
To have access to lenders that will provide funding for self-builders makes self-building accessible to many more people that it would otherwise be. While you have to prove you are a good prospect to lend money to, this will only help you to plan, prepare and then ultimately build your dream home on time and on budget.
For more information about all aspects of self-building see our section about custom and self-building.