The first and most important point to note, is that you won’t be able to borrow funds using a traditional mortgage from a high-street lender, as there’s not a habitable property to lend against, you’ll need a more specialist approach.
A self-build mortgage is a specialist borrowing solution designed for self-building, and will lend to purchase your plot and fund your build costs. It differs from a traditional mortgage because the money is released in stages, rather than as a single amount.
The stages for a self-build are generally:
1. Plot purchase
3. Frame erected or wall plate level
4. Wind- and watertight
5. First fix and plastering
6. Second fix and completion.
Positive cashflow is key to any successful self-build. It’s not just about how much you can borrow like a traditional mortgage, but when that money is available to you throughout the build, to allow you to pay your tradespeople and suppliers – whether that’s monthly, weekly or daily!
Your borrowing, unlike a traditional mortgage, is based on the expected end value of your new home rather than the current value, meaning you’ll have the funds to purchase the plot and for your building works. Just like with any mortgage, the amount you can borrow depends on your financial circumstances and how much you can afford.
While interest rates are higher than a traditional mortgage, currently ranging from 3.99 to 5.59%, most lenders offer an interest-only mortgage during the build period and you only pay interest on the mortgage funds drawn down. When your new home is complete, you can switch onto one of your lender’s traditional mortgage deals, which will have a lower interest rate, saving you money.
Building societies are the main source of lending for self-build mortgages.
Other borrowing options
If you have enough equity in your current home or own it outright, you could remortgage or secure a bridging loan. Then when your new home is finished, you can sell your old one to pay off the loan. If you’re building to sell or let, you’ll need a development loan.