Financing a Self-Build mortgage

Self-building your home gives you full control over the design, location, and quality, often at a lower cost than buying a similar property. It lets you create a home that perfectly suits your lifestyle, with the bonus of energy efficiency, long-term savings, and a real sense of pride and achievement.

What is a self-build mortgage, and how does it differ from a standard mortgage?

A self-build mortgage is specifically designed to support the financing needs of people building their own homes. Unlike a traditional mortgage, which releases a lump sum at the outset, a self-build mortgage provides funds incrementally as construction progresses. By releasing funds as needed, this mortgage helps manage costs effectively throughout the project, which can be particularly helpful for those building from scratch or making significant structural changes.

How are funds released in a Self-Build mortgage? 

Funds in a self-build mortgage are generally tied to key construction phases, allowing you to access money as it’s needed for each stage of your build.

Typical stages could include:

• Initial land purchase
• Completion of foundational work
• Construction of walls
• Wind and watertight
• First fix of electrical, plumbing & plastering
• Finishing touches like interior and exterior fittings

The specific stages and amounts released will depend on criteria agreed with your lender and project plan. The lender will typically release around 75% of the valuation (or costs incurred) on completion of each stage. This phased release helps reduce the risk of overspending early in the project, ensuring funds remain available until completion.

What additional costs should I budget for with a Self-Build mortgage?

Self-build projects come with a lot of extra costs that should be planned for in your budget. If these are not factored in advance, you may find that your budget doesn't stretch to meet them later, potentially stalling the project.

Common additional costs include:

• Survey and valuation fees: Lenders often require surveys at different stages to assess progress.
• Legal fees: You’ll need legal support for contracts, planning permissions, and potential disputes.
• Planning permissions and local authority fees: These are essential for securing project approvals.
• Project management fees: If you hire a project manager, their fees should be included. Since construction projects can be unpredictable, it’s wise to set aside a contingency fund for unexpected expenses or adjustments during the build.

​Are self-build mortgages flexible if my project timeline changes?

Self-build mortgages can offer a degree of flexibility, as construction projects experience delays due to weather, supply chain issues, or contractor availability.

A lender may be able to adjust fund release dates if timelines shift. However, it’s essential to maintain communication about any delays. Extended timelines could increase overall costs, so it’s important to consider any potential delays in your initial planning and budget accordingly.

Can I use a self-build mortgage for a renovation or extension?

Self-build mortgages can be used for major renovations or extensions that require staged financing. For example, large-scale projects like converting a barn, adding a significant extension, or doing substantial structural changes to an existing property may qualify.

Since funds are typically released at different stages, this type of mortgage is suited to projects where costs increase progressively rather than all at once. However, if your renovation is relatively minor, a different financing option may be more suitable.

Can I remortgage to a self-build mortgage?

Yes, in some cases, it’s possible to switch from a standard mortgage to a self-build mortgage if you decide to start a new construction project on your property. However, this is dependent on a number of factors about the build and your current financial status.

What if I need to pause construction for an extended period?

If you need to halt the project, communicate with your lender as soon as possible. They may be able to offer grace periods or adjustments, but extended delays could have financial implications, such as additional fees or adjustments to the mortgage terms.

Are there alternatives to a self-build mortgage for financing a home build?

While a self-build mortgage is ideal for many large-scale construction projects, other options are available that might suit different situations:

• Bridging loans: Temporary loans that can be used to buy land and commence building. They’re typically short-term and repaid by the sale of an existing property. As a result, a lender will have higher interest rates and fees to ensure they make their profit.
• Home improvement loans: Generally useful for minor renovations or upgrades that don’t require staged payments. Often, they have a higher loan amount than a personal loan and a longer repayment plan.

Alternative financing might be better if your project doesn’t require the structure of staged payments or if you’re working on a shorter timeline.

Risks and considerations of a self-build mortgage

Self-build mortgages offer flexibility but come with unique challenges. Understanding the risks can help you plan effectively.

• Cashflow: You will need initial funds to cover professional and planning fees. You will also be expected to pay around 25% of the cost of land and each build stage with the lender covering the rest. Money is released at stage completion so you may have to cover the cost of materials and labour, unless your builder will do so.
• Planning and regulation hurdles: Securing planning permission and meeting building regulations can cause delays and unexpected costs.
• Construction delays and budget overruns: Weather, labour shortages, or supply issues can push timelines and inflate costs. Lenders may set strict completion deadlines.
• Higher interest rates and restrictions: Self-build mortgage rates tend to be higher, and some lenders require professional involvement or limit property types.

What’s the best way to budget for a self-build project?

Budgeting effectively for a self-build project involves detailed planning for each phase, covering all potential expenses. Start by listing the costs for land, labour, materials, professional fees, and any extras you’d like to include. Setting aside a contingency fund of at least 10% to cover unexpected expenses, which often arise in construction. You may need more than this if your build is complex, bespoke or has more potential unknown issues. Careful budgeting can help prevent delays and keep your project on track financially.

A self-build mortgage can be a powerful tool for financing your dream home, offering the flexibility to manage costs through staged payments as your project progresses. However, it’s crucial to prepare for additional expenses, and potential delays, and to budget effectively to ensure the project remains financially viable. By carefully planning each stage, understanding all costs involved, and considering alternative financing if needed, you can set yourself up for a successful build with financial peace of mind.