Self-Build Mortgage

Is it hard to get a self-build mortgage?

Not as long as you’ve got a good income and a good deposit. This is a complicated area and as always it’s driven on three factors: Capacity, Commitment and Collateral. Lenders want to make sure you’ve got the capacity for the loan, which is your income, and the collateral here isn’t built yet. That means the risk level for the banks is very high. 

So if you don’t know where to go this can be a very difficult and time consuming thing to do. I want to try and keep this simple but if anything isn’t clear, just talk to the team and we can go into as much detail as you like.

Are self-build mortgages more expensive?

A broker would always find the best terms, but it’s all relative to the risk you’re taking. So if you look at a self-build, it will be more expensive than the country’s biggest lender. Of course it is, because there’s more risk. 

Do you need planning permission for a self-build mortgage?

Yes, that is literally the number one point. Not long ago one of my clients built a house in the back garden and didn’t get planning. Thankfully it was all fine as they lived in a spacious area and very fortunately their neighbours didn’t object. 

If you’re even considering doing this, talk to a broker first because aside from the financial side, you’ve got the planning process to go through. Planning is an absolute essential that would be a half hour podcast topic in itself. 

I’d suggest looking around your area, talking to some surveyors and viewing local planning applications. I live in a classic leafy area and if anyone attempts to build flats around here they’ll be shot down in flames. So look at the precedent for what you can do – that’ll give you a fairly good guide, but please do get that done before a shovel hits the ground.

Do many lenders offer self-build mortgages?

Probably not, although this varies over time – it depends what the market is doing. We’re talking in March 2023 coming off the back of the mini budget which shocked the financial market. So right now there’s not a lot of choice. 

There are a few specialist providers and building societies that are fantastic in this space. At the upper end, private banks are excellent as well. But when the market is contracted, there are fewer options; when the market is a bit easier there are more – but then that’s true of everything. 

We tend to work with the banks with serious form in this area – that have done it before and know what they’re doing. You don’t really want a bank coming in and not really understanding this because it could get quite messy.

How does the application process differ for a self-build mortgage?

The application process itself is pretty much the same. The difference is the front and the back end. With the application we’ll research it all, apply to a bank and do all the documents. We’ll assess your credit profile and affordability at the Agreement in Principle stage. 

Then you’ll go off and find a builder or contractor, depending on how big the project is. You need to negotiate with them and get a window when they can do the work. Once that’s all done then we’ll submit the application and get your finance underway. 

There’s a couple of differences depending whether you’re buying the land or you already own it. Once the application’s in and you’re doing the work, the back end bit that’s different is ‘staged drawdowns’. 

Let’s take a simple example. The first stage might be to buy the land. The second stage will be when building works commence. There might be two or three points at which you’ve agreed to pay the contractor or builder. You don’t want to borrow all the money on day one, because you’ll acquire a lot of interest in that process. There’s no point having money sitting around doing nothing.

So we’ll work to get you as much cash as you need at these various different stages. Building a house can take a year or two years, depending on how big the project is. 

There’s a really key thing called the Gross Development Value or GDV. Most banks want to keep a certain threshold below that total value. Over time, the value of the land and the property goes up, and so does the borrowing. You want those two things to go hand-in-hand. And that’s how the process differs from any other mortgage.

How much deposit do I need for a self-build mortgage?

The market is a bit tighter at the moment, so generally you need a 25% deposit. You can probably get away with 20% and if you have other property it might be a little bit less.

Let’s say you buy a piece of land for £100,000 and put £20,000 down on day one. Most banks will agree to fund 80% of the build work. So if the land is £100,000 so you borrow £80,000 on that. Then if the build cost £100,000 the bank would lend you another £80,000. 

I mentioned that end value – and we tend to find that those stages go up in thirds: what you buy the land for and what you do the work for. Then if you double that it gives you a rough Gross Development Value. In that example, we have got £160,000 worth of borrowing on an asset worth £300,000. That’s why banks like doing this and it’s one of the attractions of building your own home. You’re paying around two-thirds of the cost of buying a comparable property. 

For those of us that live around London and the home counties it’s very conceivable. You could spend £750,000 and get a property that’s worth well over a million at the end of it. So as long as you’re willing to take the risk and go through all these hoops it can be a really really good financial decision.

The example I gave was very vanilla, and doesn’t allow for you having more than a 25% deposit. If you have more than that available, great. You should always utilise your cash first. If you’ve got interest outstanding on the loan for a year or two that does accrue a lot. So always use your cash first.