In the UK, the self-build mortgage market is still very niche. This means that the selection of lenders and products is much more limited than it is for the standard residential mortgage market. It is therefore highly advisable for anyone considering a self-build to learn about how lenders view the market so they can understand what is available to them and what lenders want to see in potential borrowers.
Self-build mortgages are riskier than residential mortgages
From a lending perspective, the worst-case scenario (which they must consider) is that a borrower defaults on their mortgage. When this happens, the property on which the mortgage is secured will be sold and any proceeds will be given to the creditor (up to the remaining value of the loan).
With self-build mortgages, however, there may not be a property to sell, at least not a complete one. This reduces the pool of potential buyers considerably and hence increases the lender’s risk. Even when there is a property, there is a risk that the builder will not have completed it to acceptable standards, thus lowering both its value and the level of interest it will generate on the markets. Buyers should, therefore, be prepared to address these concerns.
Self-build mortgages come in two main types – arrears and advance
The single biggest difference between a self-build mortgage and a standard residential mortgage is that with the former funds are released in line with development milestones whereas with the latter funds are released when you complete the purchase. Self-build mortgages may or may not include the buying of the plot as a development milestone.
With arrears self-build mortgages, the borrower has to put up the capital to meet the milestone and then, when it is complete, the lender will release the funds to them. In other words, using an arrears self-build mortgage minimizes the amount of working capital you need. It does not eliminate the need for you to have your own funds. Arrears self-build mortgages are the more common form of plan.
With advance self-build mortgages, by contrast, the funds are released before the milestones are met. Remember, however, that these days it’s highly unusual to get any sort of mortgage at a 100% loan-to-vehicle rate. With self-build mortgages, 75% to 80% is more likely. This means that you will need some working capital of your own, albeit less than with an arrears self-build mortgage.
Self-build mortgages are generally more expensive than standard residential mortgages
You should expect to pay higher interest rates for a self-build mortgage than for a standard residential mortgage. This is partly because of the increased level of risk and partly because of the reduced level of competition in the market. You should also be prepared for arrangement/introduction fees.
As with all mortgages, you can expect your application to be scrutinized thoroughly. In addition to convincing your lender that you are financially sound, you will also need to convince them that you know what you are doing with the proposed build. Remember that in the residential mortgage market a lender can get a professional surveyor to give an opinion on a completed property. They may also have data on the sales of comparable properties. With self-build mortgages, however, they have far less information available to them.
Self-build mortgages can be converted to residential mortgages
Once a self-build property is complete, you have potential access to all the mortgages in the standard, residential market. These can be much more competitively-priced, however, as always, you need to do your sums carefully before deciding whether or not to switch and, if so, when and to what. Remember that there will be costs in moving from one mortgage-lender to another (plus administration) so you want to be sure that these are justified.
Your property may be repossessed if you do not keep up repayments on your mortgage.