Did you know that some #mortgage lenders will lend you a mortgage to build your own home EVEN if you’re a first time buyer?
Self-build mortgages are like typical residential mortgages except you receive the loan in stages, rather than as a lump sum. This is a smart move as it helps the borrower to stick to their budget and limits the likelihood of them running out of money halfway through the build.
The lender will decide with the borrower when they receive their loan instalments, for example, at the beginning to pay for the land, once the foundations are laid, once the roof is on, the electrics and plumbing are in, and so on until the final instalment which is paid on completion.
There are two main types of self-build mortgage: arrears and advance.
– Arrears loan. The funds are released to the borrower after each stage of the build is completed. Meaning you will need to have sufficient savings in place to pay for that stage of the build before your loan instalment is paid to you. This is the most common type of self-build mortgage.
– Advance loan. The funds are released to the borrower before they start on the next stage of their build so they can use the money to pay for it. Not many lenders arrange advance loan self-build mortgages.
So, what are the key things I need to know about a self-build mortgage?
1) You will need a large deposit. Lenders view them as a higher risk type of mortgage so they typically won’t lend more than 75% of the value of the land or the projected value of the finished property.
2) You will need to prove that you are a trustworthy borrower. Make sure you have a good credit history, proof of a stable source of income, and that all of your required documentation is in place including planning permission, architectural drawings and plans, detailed cost projections and approval of building regulations.
3) Most self-build mortgages are arranged on an interest-only basis during the build period and, following a survey of the finished property, should convert to a repayment mortgage.
4) The interest rates on a self-build mortgage may be higher than a typical residential mortgage, to take account of the higher risk. But once the property is complete and the mortgage converts to a typical repayment mortgage then the interest rate is likely to come down.
Given that self-build mortgages are a special type of loan, it is highly recommended that those considering such a mortgage should speak to a specialist mortgage broker who will be able to take them through the options available and help them with their application and documentation.
