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A guide to self-build mortgages

A self-build project is a unique undertaking and as such, can't be financed by traditional means.

Fortunately, with self-build projects seeing a surge in recent years, more lenders are bringing out mortgage products designed specifically with self-builders in mind.

In this guide, we'll explore how self-build mortgages work, how they differ from traditional home loans and how to find the best deal.

How self-build mortgages work

Unless you're lucky enough to have enough cash to fund your self-build project outright, you'll have to take out a specialist home loan.

Self-build mortgages differ from standard products in several ways, however, the greatest difference lies in how you receive the funds.

As opposed to traditional mortgages, self-builders receive their loans in stages, which are released as the project progresses. Lenders operate in this way to minimise their risk and make sure that you keep to budget as the work goes on.

Different lenders operate to different schedules, but in general, tend to release funds when you reach different milestones, such as:

• Buying the land
• Setting the foundations
• Building the main portion of the house
• Fitting the roof (and getting it watertight).

At each of the milestones set by the lender, some will send out a valuer to ensure the section has been satisfactorily completed. However, others will release the cash to you at the beginning of each stage, rather than on completion. In cases like this, site inspections will still be required before funds are released.

Self-build mortgages also tend to come with higher interest rates, so it's well worth shopping around to get the best deal. It's also likely that you'll have to put down a bigger deposit – typically between 25 to 50 per cent.

Detailed plans will need to be submitted as part of the application, in addition to predicted costs and lenders will often require proof that planning permission has been granted before they'll consider you.

The upsides

Although there's more effort involved than a standard mortgage, there's several potential benefits for self-builders. As well as getting a unique home that meets your specifications and offers much more than a run-of-the-mill property – going down the self-build route can also save – and in some cases – make you money.

Self-builders can potentially avoid paying thousands of pounds worth of stamp duty than those buying a similar standard of property conventionally. This is paid by buyers on residential land and properties costing more than £125,000 and is banded into rates.

As the government's residential property rates information details, these are:

Property Price | Stamp Duty
Up to £125,000 | Zero
The next £125,000 (the portion from £125,001 to £250,000) | 2%
The next £675,000 (the portion from £250,001 to £925,000) | 5%
The next £575,000 (the portion from £925,001 to £1.5 million) | 10%
The remaining amount (the portion above £1.5 million) | 12%

It's also worth noting that stamp duty is only paid on the percentage that falls over the threshold, so if a property was bought for £125,100 – they'd only pay 2% of £100 (£2).

As a self-builder, you're able to largely sidestep this and will only face stamp duty if the plot of land you're buying costs more than £125,000.

And while you probably plan to stay in your self-build property for the foreseeable future, when it comes to re-sale, the prospects are positive.

A recent report from Lloyds suggested that the average overall cost for a self-build project stood at around £255,543. However, This is Money claims a savvy self-builder can expect to see gains of around 20 to 25 per cent if put on the open market (depending on location and quality).

 

Structural Defects Insurance

Finding the best deal

Since self-builders need to keep a close eye on costs, it pays to shop around before committing to a mortgage.

Fortunately, as demand has grown, so has supply and there's more products for self-builders on the market than ever before.

Comparison giants like Go Compare and Money Supermarket have jumped on the bandwagon – listing products from partner organisations. However, since not all lenders opt to list themselves (and pay commission to) sites like these, it's worth looking further afield to get a comprehensive view of the market.

Consumer advocacy group Which? also offers a self-build comparison service that provides impartial advice without paying commission to referrers.

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