any of us love the idea of building our own home, designing it the way we want it and personalizing it to our liking.
However, even if you are a master builder, you still need some investment, and this is where a DIY mortgage comes in handy.
Our guide explains the different types of DIY home mortgages available and how to get them.
What is a self-build mortgage?
A self-build mortgage is a loan that you take out to finance the construction of your own property.
Loans differ from a standard mortgage loan because the bank does not have collateral (namely, existing property) against which the bank can lend.
This means that you do not receive money in a lump sum, but in stages. This reduces the risk for the lender to check if the build is going according to plan and you are spending money on what it is for.
When will self-build mortgage funds be released?
Funds are released in tranches, as a rule, upon reaching the following assembly stages:
- When you buy land (and get a building permit)
- The foundation has been laid
- The property is built up to the eaves
- The roof is finished (wind and waterproof).
- First fix (i.e. plaster)
- Second fix (i.e. final electrical and plumbing)
- Certified as completed by a surveyor
What types of mortgages are available for self-construction?
These types of specialized home construction loans fall into two categories:
Debt: Released funds after each of the agreed stages of construction has been completed. This is a more common type of home-building mortgage, the problem is that you need to have enough cash to get started.
Promote: Cash is released before each stage of the assembly. This has obvious benefits for those with less prepayment because you have the money to pay for materials and labor.
But since the risk to the lender is higher – because the construction may not be in line with the plan or budget – fewer lenders are willing to offer this type of home-building mortgage.
How to get a mortgage for self-construction?
Do-it-yourself mortgage loans have traditionally been less common than standard mortgage loans, which are less readily available through major banks. You may need to go to a specialized lender and a mortgage broker or consultant can help you.
Earlier this spring, the UK government beganHelp build‘A £ 150 million program to make it easier and more affordable for people to build their own homes.
What lending criteria will need to be met?
Since most home building mortgages are mortgages, you usually need a large deposit to get started. Usually this is at least 25% of the total cost of the land and the proposed construction.
You will also have to bear the costs of the initial and “expected cost”. A building permit is required, as is the approval of plans for the property you want to build.
Some lenders may restrict the type of structures they provide to conventional structures such as masonry and traditional wood frames. Whichever structure you choose, it must comply with building codes.
You will also need to show a projection and cost breakdown to convince the lender that the plan is feasible. Some will insist that a qualified quantifier provide this information, and you will need to anticipate over-budget contingencies – usually around 20%.
Accessibility is also important. If you are renting a property during construction, the lender will take these costs into account.
How do you compare interest rates?
Because of the added risk to lenders, interest rates on home-build mortgages are usually higher than on standard mortgages.
The rate varies, but can range from 4% to 6% by mid-2021. The organization fees will also vary depending on the broker or the lender’s terms and conditions, and you can be bound for one to three years.
Once the inspector confirms that the property is habitable, you can switch to a lower interest rate without penalty during the tie-in period.
Although fewer lenders offer home-build mortgages, you will still have access to different types of mortgages, including fixed rate options and tracking options.
Do you have extra documents?
Compared to other forms of home loan, you will need additional documentation when applying for a mortgage to build a home.
This usually includes the preparation of documents relating to:
- Building permit
- Construction drawings
- Project estimate
- Building code approval including SAP calculation (energy consumption)
- Object insurance and structural guarantee
- Architect professional liability insurance
What are the pros and cons of a self-build mortgage?
- Interest rates are higher, which makes borrowing more expensive
- Limited choice of lenders
- Strict lending criteria, including a large deposit
- Risk of over budget / build time
- You will receive funding to build your dream property in the style of your choice.
What is the alternative to a self-build mortgage?
If you already own a property with sufficient capital, you may want to consider a bridging loan.
Here, you re-mortgage your mortgage to pay off the land and construction costs of your new business, and once complete, sell your old home to pay off the loan.
The downside of bridging loans is that they can be more expensive. This is a short term option, and the organization fees and even exit fees can be quite high.