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Self build mortgages
If you're building your own house, you'll need a self build mortgage. These products work slightly differently to traditional mortgages.
There are many advantages to doing this. You’ll get a property built to your exact tastes, and it usually works out cheaper than buying a similarly sized new-build property.
However, self build mortgages work slightly differently to traditional mortgages. You’ll typically receive funding at various stages of the build, rather than in one lump sum. In many cases, you’ll need a bigger deposit to be eligible for these products. You can often expect to pay a higher interest rate too.
What are the different types of self build mortgage?
With self build mortgages, you’ll typically receive the money required to fund each of the following stages.
- Buy the land.
- Build the foundations.
- Construct the shell of the property.
- Complete plumbing, plastering and electrical wiring.
- The finishing touches and final valuation of the property.
With an arrears mortgage, you’ll have to fund each of these stages yourself, before claiming back the costs from your mortgage provider. It’s imperative to provide proof of the costs of labour and materials. It’s common that you’ll be offered better terms on this type of mortgage.
Some lenders also offer advance mortgages, where the funds for each stage are delivered before construction starts. You’ll still need to provide proof of how the money was spent.
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How to find a self build mortgage
Not all mortgage lenders offer funding for self build projects. The best way to find a lender willing to work with you is by using a professional mortgage adviser. These individuals have the knowledge to be able to recommend the lenders most likely to approve you, depending on your financial circumstances.
How much do self build mortgages cost?
Most self build mortgages come with introductory deals to tempt customers. They are most commonly available as discount or fixed-rate deals, which switch to the lender’s standard variable rate after a set number of years.
You can expect to have to stump up a bigger deposit compared to traditional mortgages. Often, lenders will set different deposit limits for the land purchase and building costs. For example, they’ll demand a minimum 25% deposit for the land and 15% deposit for the materials and labour.
The interest rates on self build mortgages tend to be higher than traditional mortgages, but it is possible to remortgage to a more competitive deal once the buiding is completed.
What are the advantages and disadvantages of a self build mortgage?
Pros
- It usually works out cheaper to build a house than to buy one.
- You don’t pay interest on the full cost of the house until it’s completed.
- You can remortgage to a better deal once the property is built.
Cons
- A larger deposit is needed.
- You’re likely to pay a higher interest rate.
- There is less choice of mortgage providers.
- There is a higher risk of something going wrong and extra funds being needed to fix it.
Tips to be approved for a self build mortgage
- Obtain planning permission. You’ll need planning permission before building on any plot of land.
- Save a large deposit. The less you need to borrow from a lender, the more likely you’ll be approved for a mortgage.
- Apply for a mortgage you can afford to repay. Mortgage lenders will check your income and outgoings to assess how likely you’ll be to make timely repayments on your mortgage.
- Clear your debts. The lower your existing debt, the more of a reliable borrower you’ll be perceived as. If possible, close all existing access you have to credit, as lenders often view this as an opportunity to get into additional debt.
- Build your credit score. Based on your previous financial behaviour, your credit score is an indicator of how likely you’ll be to make timely mortgage repayments. Making timely repayments on your bills will boost your credit score, while late repayments and going overdrawn will make it drop. Applicants with a high credit score are more likely to be approved for a self build mortgage.
- Talk to a mortgage broker. A mortgage broker can point you towards self build mortgage providers most likely to approve your application.
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