Despite the current financial climate, self build homes prove themselves to be popular options each year for a certain type of potential homeowner. They can be designed specifically for the property intended to be built, and can if the right mortgage is found can produce significant financial gains for those intending to sell once the house is built. For anyone planning on building their own home that does not already have the money to commence building, a self build mortgage is the best option.
What are Self Build Mortgages?
Self build mortgages are specialist financial products, and are the most common method of financing self build homes. Unlike traditional mortgage types, payments from self build mortgage lenders are made in stages so the borrower receives a steady stream of financing for the building costs throughout the building term.
The first stage of self build finance begins with the purchase of land. Provided that the mortgage is on an arrears basis, whereby a lender only releases money once a building stage is complete, around 75% of the purchase price or value of the land will be forwarded to the borrower once it has been bought.
As the build progresses, self build mortgage providers will pay out more of the loan until the property is complete and the entire mortgage is taken out. There are usually five stages, which might include any preliminary costs and foundations, wall plates, roofs, and plastering.
With an arrears based self build mortgage, each building stage has to be agreed with the self build mortgage provider. Significant downsides to such mortgages are that the builder will have to pay upfront fees for any building work; a fee is charged for each stage inspection, and a further fee will be charged if a revaluation is required.
Borrowers facing cash flow difficulties could otherwise opt for the advance stage system, where self build finance is given in forward payments. The money is given by mortgage lenders before the relevant building stage, and can be up to 90% of the building materials.
Self Build Mortgage Rates
Those who qualify for self build mortgages may be facing unfavourable interest rates once monthly repayments begin. Self build mortgage rates are usually high when payments are made in advance of building work starting due to this being a greater risk taken by lenders. In the case of an arrears mortgage, however, a lower self build mortgage rate is incurred by the borrower as this method is less risky for the self build mortgage lender.
There are still many benefits to these types of mortgages. The best self build mortgages are those which are tailor-made to suit the borrower’s specific requirements. In the long run, the right self build mortgage could save up to a third of the price of a ready-built property once the point of mortgage redemption is reached. Conversely, if the wrong mortgage is selected then remortgaging may be necessary before the house is built. This could mean substantially increased costs, including substantial mortgage fees, so should be guarded against.
Self Build Mortgage Calculators
To work out whether this financial product can be afforded, a self build mortgage calculator can be used to assess the costs and interest rates involved with self build finance. It might also be worthwhile to compare self build mortgages between lenders and between arrears and advance variations to find the mortgage best suited to the borrower’s financial situation.