There is a big difference between a traditional mortgage and a self build mortgage. It is good to understand the difference between these two terminologies. Self-build mortgages are specially designed to help self-builders to build their own homes.
The dream of building your own home is with so many people. If you don’t have enough cash to actualize your dream, you can make good use of a self build mortgage to get yourself a home.
In this article, we will help you to understand what is a self build mortgage. You need to understand different types of mortgages, the required documentation, expected interest rates, as well as the available deals.
How a Self Build Mortgage Works
Unlike traditional mortgages where the lender releases all the funds as a lump sum upon the completion of a sale, in a self build mortgage, the lender releases the funds at key build stages. Some self-build financiers also lend their customers in plot purchase. However, the interest rates are generally higher than the standard rates for a remortgage or house purchase. Also, fee arrangements tend to vary from one lender to another. Once the new house is habitable, some banks may allow the buyer to switch to a lower interest rate.
Types of Self Build Mortgages
There are basically two types of self-build mortgages that you can select from. The first one is what we refer to as the arrears type. In this case, the stage payments are disbursed once every stage of the build is completed. This type of self build mortgage for individuals who have their own large cash injection to invest in the project.
The second type of self build mortgage is the advance type. In this case, the lender releases the stage payment at the beginning of every build stage. It means that you will have the money at the point of need when the bills for materials are labor is due. Therefore, it removes the need for short-term borrowing or bridging loans to cover for any shortfalls.
The primary advantage of the advance self build mortgage is that it will help you with the cash flow and is fit to investors who don’t have huge pots of savings to fund the building as it progresses. However, we have very few lenders who offer this type of facility. Some financial institutions will lend you on the existing property, land purchase, or at the successful completion of the key stages. The products that financial institutions offer under each category tend to vary from one firm to another. It is upon the borrower to look at the terms and conditions that each lender offers and choose what best suits his needs. The secret is choosing a self-build product that will not strain you in any way whatsoever.
Self Build Mortgage Interest Rates
Self-build mortgages tend to charge a higher interest rate than the remortgage or standard house purchase. In most cases, their rates tend to vary from 4 to 6 percent per annum. Also, the arrangement fees tend to vary from one lender or broker to another. You can be tied to the lender for even three years. Once your property is now habitable and a qualified surveyor from RICS has conformed it and given you a certificate for the building control certification, we have lenders who will allow you to switch to a lower rate in the ‘tie-in-period ‘with no penalty interest.
Borrowing Limit for
The maximum amount that you can borrow under this loan facility depends on your unique financial circumstances. The other factors that affect the amount that you can borrow are your income and outstanding debts. The lender will want to establish your creditworthiness before disbursing the loan. Therefore, the primary defining elements are your construction budget and the ability to repay the loan. Building societies and banks use the affordability calculation to evaluate the customers’ borrowing limit. Therefore, it is not just a matter of giving out the loan for the sake of it. No lender will disburse a mortgage to you if he feels that you cannot afford the installment. The Financial Conduct Authority normally regulates these types of mortgages. If you don’t qualify for today, you can always improve your creditworthiness and make an application at a later date.
Things to Consider Before You Apply for a Self Build Mortgage
The place you will be living as you continue building will affect your ability to get a loan for building your dream home. For example, mortgage payments or monthly rental payments will affect your affordability calculation.
Some lenders allow borrowers to make upfront rental payments that will not affect your monthly expenditure versus income. Besides, we have lending institutions that don’t give out loans to certain types of constructions and hence you have to check with them. Your construction and design methods should also comply with the existing building regulations.
The criteria that lenders use vary from one to another. Let them understand your building type and all the payment terms and conditions that your supplier stipulates. We have self build mortgage lenders who expect their customers to work with fixed cost building budgets. Others expect a qualified quantity surveyor to provide information on the cost of a building. Make sure you check with the lender what they want. Your built cost should also have a minimum of 20% contingency.
There are other costs that you need to provide to the lender as part of the budget control estimate or full project cost. These include the land purchase and other associated fees, project management like health and safety compliance, and gaining planning consent. The other costs include site preparation or demolition, construction costs, and construction design fees. You should demonstrate to the financier that the funds are sufficient and you are competent to complete the project.
You need to meet the above criteria to qualify for a self build mortgage. However, there is some documentation that you will need before making your application. Make sure you know what your lender wants in advance so that you can put your house in order early enough. With everything in place, you will not fail to get a self-build mortgage for constructing your dream house.