How does a self build mortgage work?
In a similar way to new build mortgages, you would usually apply for a self build mortgage before any construction work has begun. As a consequence, these mortgage types are a higher risk to lenders as there is no existing property. As a result, interest rates are typically higher for self build mortgages. This might make it difficult for you to secure a mortgage if you are looking to build a house with a poor credit history.
When will funds be available?
The main difference between a self build mortgage and other mortgage types are that the lenders will release funds to you in stages during the build, rather than in one lump sum. This is to reduce the risk to the lender and to also ensure that money is spent as planned or used up part way through the project.
Generally, you will receive the funds in the following releasing stages;
- when you have bought the land
- once the foundations are down
- when building work is up to the property eaves
- when the roof is watertight and the plaster is dry
- upon property completion.
Generally, funds at each stage are only made available once the work is complete and a valuer has visited the site. However, some mortgage providers will release the funds at the beginning of each stage. This can be useful if you don’t have the cash upfront to pay for materials or contractors.
People choose to build their own property are because there are many benefits including;
- The opportunity to design and build a property that meets your own wants and needs.
- Savings on stamp duty – which is generally not a cost when building a property yourself. You only have to pay stamp duty if the land you buy exceeds £125,000.
- Financial gains – most people find that their property is worth much more in value than it cost them to build.
However, there are some disadvantages to building your own property, most of which make it only possible for people who have a large amount in savings to build:
- Larger deposit amount – this is usually at least 25% of the total mortgage amount, but might be as much as 50%.
- A large amount of paperwork – including plans for the property and projections of costs.
Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We have a panel of trusted mortgage lenders and will help you choose the right provider for your circumstances. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only offer you products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as it can allow you to make lower repayments, however as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
A tracker mortgage is similar to a variable rate mortgage (where the interest can move up and down); but these instead track a nominated interest rate rather than the lenders SVR. Tracker mortgages are usually linked with the Bank of England’s interest rates (plus a few percent).
A capped mortgage is the same a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.
Offset mortgages are linked to a savings account as well as your current account. Each month the lender will look at the amount you owe on your mortgage and then will deduct the amount you have in savings. These types of mortgages work well for higher earners or people who have a good amount in savings that they want to use towards paying their mortgage.