Ultimate Guide to Self Build Mortgages & Latest Mortgage Rates

Self builders need a specialist type of mortgage loan to enable their projects. There are three main types of self build mortgage to choose from when financing your dream home. They are:

• Advance stage payment mortgages (cost-based)
• Arrears stage payment mortgages (value-based)
• Arrears stage payment mortgages (cost-based)

With each of these self build mortgages, money is released in phases to allow you to pay your bills at key milestones in your project. These are typically: buying the plot; foundations done; wall plate/frame erection; wind and watertight; first fix; second fix/completion.

The amount paid out from your self build mortgage per stage is a percentage of either your actual costs or the value of the works. The payment is calculated based on your project’s individual requirements.

Arrears vs advance payment self build mortgages

This refers to when the mortgage payments are made to you either after or before the relevant stage is completed.

For instance, when you put in foundations, with an advance stage payment option, your self build lender will give you the agreed sum for this phase before you begin. This means you can buy the materials and pay for labour using your mortgage.

An arrears product means you need funds to pay suppliers and trades yourself. You’ll then be reimbursed by your self build mortgage lender (up to an agreed percentage of the costs) when that stage is complete.

Cost-based vs value-based self build mortgages

A cost-based mortgage is linked to what you actually pay for each stage of your project. With a value-based product, meanwhile, the lender sends a surveyor to inspect each completed stage of works, and pays out (at the agreed percentage) based on their valuation.

“The majority of our mortgage products are now cost-based, as this gives customers peace of mind,” says Chris Martin, head of product development and underwriting at BuildStore.

“The amount paid out – whether in advance or arrears – is guaranteed. Value-based mortgages are more uncertain as it’s not always easy for a lender to find comparable projects to value against. So, the customer has the worry they won’t pay out what was expected.”

Value-based mortgages are available direct from lenders and via brokers. But BuildStore is the only one to offer cost-based mortgages, which are provided through various building societies for a small fee.

What’s the benefit of a cost-based self build mortgage?

With this product, the pay-out for each stage payment is guaranteed (in both advance and arrears mortgages). So you’re not at the mercy of a surveyor’s opinion.

If you opt for advance staged payments, there’s also no pressure to have a big lump sum in the bank.

This type of self build mortgage is well suited to projects where much of the build is done off-site – structural timber and oak frame houses, for example.

BuildStore currently has 12 building societies offering cost-based products, providing up to 95% of project costs and up to 85% of the final property value on sums from £50,000 to £1m. Loans above £1m may be available by referral.

Can I get a self build mortgage for the land purchase?

Some self build mortgage lenders – although not all – will be happy to lend on the initial land purchase for your project.

In the context of applying for a self build mortgage, ‘land’ must come with some form of current planning consent to qualify.

This could be outline planning permission (OPP) or detailed planning permission (DPP). Either way, there must be a sufficient unexpired amount of time left on the planning consent to enable a lead-in time before your construction phase.

Who are the best self build mortgage lenders?

The best lender and mortgage product for you will depend on your circumstances, project profile and the lender’s rules.

If you have less cash of your own, an advance stage payment cost-based mortgage might make the most sense. Bath Building Society (3.90%) and Furness Building Society (also 3.90%) both offer low interest rates, while Darlington Building Society is offering loans up to £1m (at 4.84%).

You may find the keenest deals for large loans with an arrears cost-based self build mortgage. Buckinghamshire Building Society, for instance, has a product up to £1m with a loan-to-value of 80% and 4.59% interest rate.

Self build mortgage application basics

When applying for a self build mortgage, you’ll typically need to complete a detailed costings form (including an affordability check). Alternatively, for a fee, one of the broker/lender’s cost assessors can do this for you.

The self build costings form goes into fine detail to work out accurate pricing for each stage, tailored to your project. You’ll then agree a scheme of stage payments, taking into account your build cost plan, the cash you have available and the lender’s criteria.

Applying for any type of mortgage has become a complicated process, with new affordability rules to understand as well as a variety of changeable criteria to keep up with. With a self build or renovation project this can be even more challenging, as there is so much more to consider when arranging your mortgage finance.

For instance, where do you intend to live while your house is being built? And how will the cost of these arrangements (i.e. mortgage or rental payments) affect the amount you’re able to borrow to construct your new property?