Everything You Need to Know About Self-Build Mortgages

No, a self-build mortgage isn’t a loan you choose the terms of (wouldn’t that be nice?). Self-build mortgages are for people who are renovating or building their own home from scratch, and they let you drip-feed money into your build project at key stages. Here’s everything you need to know about self-build mortgages.

What are the two types of self-build mortgages?

The most important thing to say upfront is that you’re going to pay a higher interest rate on a self-build mortgage – usually between 4% and 6% – and it’s harder to get because you’ll need to meet enhanced affordability checks, since you’ll likely be renting or paying a mortgage somewhere else, too. Once your home is liveable, you should be able to drop it down to a more reasonable rate, but that’s not a guarantee, so check your terms first.

There are two types of self-build mortgages:

• Arrears: This is the more common type. Payments are handed out after each stage of the build is completed. This type of mortgage is better for people who have a lot of cash on hand to help pay for the project.
• Advance: Payments are released at the beginning of each stage, making money available when the bills for labour and materials are due, removing the need for bridging loans or other short-term borrowing. This type of mortgage helps with cash flow and is better for people who have less money on hand to fund their project. Fewer lenders are prepared to offer this kind of mortgage, however.”

Regardless of whichever you choose, the money is released at key stages (for new builds):

• When you get the land and planning permission
• At the substructure
• Just before you have the roof trusses go on, aka wall plate/eaves height
• When the windows and roof are finished and it’s wind and watertight
• At the first fix and at the second fix
• Upon certified completion

It’s slightly different for mortgages on renovations or conversions, so check with your lender.

Why would you want a self-build mortgage?

You’d probably want one if you don’t have the money to finance your build upfront, which most people don’t, seeing as homes can cost hundreds of thousands to build. Another reason is to skip out on paying Stamp Duty; you won’t pay it if the land is less than the threshold, and you don’t pay on build costs or the finished home at all. This can save you tens of thousands in the long run on a highly-valued home.

How can you apply for a self-build mortgage?

You’ll need to plan about 3 months for the process. It takes longer than a standard mortgage. According to Homebuilding, “the documentation required is essentially the same as a standard mortgage. However, additional supporting documentation will be required, which may include:

• Copy of planning permission
• Copy of construction drawings and specifications
• Copy of total project cost estimate (where possible, fixed-price contracts)
• Copy of Building Regulations approval
• Copy of site insurance and structural warranty
• Architect’s professional indemnity cover (if required)
• SAP calculation (this will be in the Building Regulations package)
• Experian credit report

Expect to pay for several valuations, too. They’ll do one in advance to determine the current and future value, then do one in the middle to see if you’re on track, and finally, another at completion of the build. These can be several hundred pounds each time, so make sure to budget for them.

Common questions about self-build mortgages

Q. How much can I borrow?

A. It’s standard to receive 75% of land and build costs as a self-build mortgage, but some lenders may offer more.

Q. Do I have to sell my current home before my new house is ready?

A. Not necessarily. If you have savings for 15-25% of the land, materials, and labour costs, then no. If not, you may need to unlock that equity by selling before taking on a self-build mortgage.

Q. When should I start the mortgage process?

A. ASAP. You need to know your budget before taking on an architect. You won’t want to get married to a design you can’t afford. Talk to a lender and get some estimates of what you can borrow before you have plans drawn up.

Q. What are the common interest rates?

A. Buildstore says, “Interest rates currently range from 3.99% - 5.99%, with most lenders offering interest-only during the build – so you only pay interest on the funds drawdown and keep your monthly payments affordable. What’s more, when your new home is complete, you can switch to one of your lender’s traditional mortgage deals, which will have a lower interest rate and bring your payments down.”

Q. Can I borrow on the estimated completed house value?

A. Yes, depending on the lender. You could get a loan based on up to 85% of the final home’s value.

Q. How much would it cost?

A. Here’s a great example from Ecology:

A mortgage of £95,300 payable over 25 years on our Standard Variable Rate, currently 4.15%, would require 300 monthly payments of £510.96.

The total amount payable would be £154,553.92 made up of the loan amount plus interest (£58,214.92) and a mortgage application fee of £799 and a valuation fee of £240 (assuming a purchase price of £200,000). The overall cost for comparison is 4.40% APRC representative.

Other ways to finance a build

If you’re worried about taking on a self-build mortgage, there are other options:

• You could pay in cash (if you have a spare +/-£500k laying around).
• You could sell your home and live with a relative/friend or in a rental, hotel or caravan.
• You could re-mortgage your existing home to draw equity out of it.
• You could get a custom build mortgage (which is a little different and has some restrictions and benefits baked in.)
• You could borrow from friends and family.
• You could crowdfund your build through flexible micro-lending platforms.

However you do it, you’re likely to need a conveyancer. Get a ton of great quotes from local conveyancers in minutes with our fabulous, free online tool.

About Stamp Duty for First-Time Buyers

The UK Government is committed to all would-be homeowners having the option to buy their own home; that’s why there are so many attractive programs for first-time buyers, and why the subject features heavily in government budgets. If you’re keen to learn all about Stamp Duty, its devolved counterparts, and how it all affects first-time buyers, we’ll break down the key components.

What is Stamp Duty?

In short, it’s a tax on property purchases. There are actually different names for Stamp Duty depending on where you live, but they all have the same general purpose: to collect money for the government coffers on every eligible land and property sale. According to gov.uk, “you must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland.

The tax is different if the property or land is in;

• Scotland – you pay Land and Buildings Transaction Tax.
• In Wales – you pay Land Transaction Tax if the sale was completed on or after 1st April 2018.”

This allows the devolved administrations to collect direct revenue on home and property sales in their countries, but it also changes what you pay, when, and to whom, depending on where you are in the UK. Your solicitor can advise you of what is owed and will usually pay it on your behalf.

How much is Stamp Duty?

Depending on where you live, you may not have to pay any tax at all. England, Northern Ireland, Scotland, and Wales all set their own levels as devolved governments. Plus, with the benefits of Covid relief measures still in place, when you buy matters too. Here’s the rundown based on today’s system:

• England & NI - no Stamp Duty up to £500k, then that lowers to an exemption on the first £300k from 1st July, 2021. That’s because first-time buyers had an exemption up to £300k on their first residence before Covid relief was put in place.
• Wales - no land transaction tax up to £250k until 30th June, 2021, then it drops back to £180k tax exemption.
• Scotland - no land and buildings tax up to £250k until 31st March, 2021, then that reduces to an exemption on the first £175k.

Current exemptions cover 85% of all home purchases, so there’s a big chance you’ll owe nothing.

“Okay, but what if the property I’m buying is more expensive than that? What will I pay?”

Usually, it will only be 5%. Here are the rates for England & NI, Scotland and Wales. You only pay tax on the amount that goes over the threshold. So, in England, if you purchased a home on 30th June, 2021 for £550k, you’d only pay the 5% Stamp Duty on the £50k. However, if you waited until 1st July to close that sale – just one day later – you’d pay a 5% Stamp Duty on £250k. That’s a vast difference of thousands of pounds. So, if you’re in the market for your first home, it’s a great idea to shop now.

When do I need to pay Stamp Duty?

In Scotland and Wales, you have 30 days to pay, but in England & NI, you must now pay within 14 days of completion. In most cases, your conveyancer will do this for you, but you can also pay for it yourself if you wish. Either way, you’re still ultimately responsible for making sure it’s been paid. Be sure this has been completed or you could face some nasty fines.

How do I pay Stamp Duty?

How you pay depends on where you are. As we mentioned before, most of the time this is done by your conveyancer, who will then they’ll you for it afterwards. However, if you want to pay it yourself, that is an option. Each of the devolved governments has its own processes:

• England & NI – You can pay HMRC directly by phone or online, or you can also pay with help at your bank or post office.
• Scotland - Pay online or by phone directly to Revenue Scotland. These are currently the only ways to pay, but post-Covid may allow postal payments to resume.
• Wales - Pay the Welsh Revenue Authority online or by phone directly. There are currently no other ways to pay due to Covid restrictions.

Remember, you need to file a Stamp Duty return even if you’re exempt and there is no money owed.

Can I just add it to my mortgage?

Yes, you can, but it’s not necessarily a good idea. According to MSE, “There are two main things to consider here. Firstly, as mortgages tend to be taken out over a long term (25 years or more), that's normally how long the Stamp Duty borrowing will last too. Over a 25-year term at a rate of 5%, that extra £5,000 borrowing will cost around £8,500 in interest, so it's vital to be aware of the cost. Secondly, this could affect your loan-to-value ratio (LTV) – the measure of how much of a property's value you are borrowing.” You could actually end up in negative equity or with less attractive rates simply by adding on Stamp Duty to your mortgage.

Who doesn’t pay Stamp Duty?

You won’t need to pay any Stamp Duty if your property is under the threshold. MSE also states the following exemptions:

• Transfer of property in separation or divorce. If you’re divorcing or separating from your spouse or partner, there’s no Stamp Duty to pay if you transfer a proportion of your home’s value to them.
• Transfer of deeds. If you transfer the deeds of your home to someone else – either as a gift or in your will – they won’t have to pay Stamp Duty on the market value of the property.

Overall, most first-time buyers will enjoy an exemption from Stamp Duty, but it’s good to be informed should your property fall outside of the allowances. When you’re ready to start your conveyancing, you can find an expert for free with our tool.

What Costs Should I Expect When Selling a House?

Selling your home is a trying experience – from negotiating agents to befuddling contracts, there’s a lot going on. If you’re considering selling, you’re probably wondering most of all about the costs involved. Don’t worry, we’ll break it down. However, if you’re purchasing a new home as well, you might want to have a look at our useful buyers guide, because there are hefty costs associated with buying a home, too. For now, let’s explore house selling costs in detail.

Costs before accepting offers

If you watch any property selling shows, you probably know about home staging; it’s the process of creating an ambiance and desired look through interior design, and it can increase your offer value by 10%. According to the HSA Report 2019, “85 percent of estate agents report that a staged home sells up to three times faster than a non-staged property.” This is because people can see themselves in the space and visualise living there. It’s not a cheap service, however. Staging can run you between £500 and £5k. This is determined by how many rooms you have and the condition of your existing furniture.

Additionally, you may want to do some standard improvements to the home, such as replacing carpets, painting, and pressure-washing. A professional cleaner can get the grime off of those hard-to-reach places. If your garden is tired, get to the garden centre for a spruce-up ASAP. You don’t have to spend much, but anything you can do to improve the roadside appeal will increase the value of offers you receive. Budget to spend around £1.5k -£3k on these improvements. Your estate agent may be able to suggest improvements that will net you the best return for your investment, so it’s worth asking.

Costs before sale completion

You’ll need to provide your buyer with an EPC rating. According to Which?, “you can expect to pay somewhere between £50 and £120 for an EPC - but they're valid for 10 years, so if you bought your home less than a decade ago you may be able to use the existing one and save yourself some cash.” Plus, you’ll need to hire a conveyancer (we can help with that). Costs for conveyancing when selling a home can range between £400 and £1.5k. Then there are other incidentals like money laundering checks, transfer fees and title deeds which cost under £75 in total. Check to see if they are included in your conveyancing fees.

Costs after sale closing

The single biggest selling cost is estate agent fees. In terms of fees, estate agents charge a percentage fee, which can be anywhere between 0.75% and 3.0%+VAT of the agreed selling price for your home depending on the type of contract you opt for with your estate agent. This is why you should always negotiate. Give them a sliding scale where they get more when your house sells for more money. This will keep them hungry to get you the best deal. Lastly, read the contract carefully and make sure you know what other fees are included in the rate. Oh, and check for VAT inclusion – you don’t want an extra 20% sneaking up on you.

Lastly, you’ll need to move somewhere else. You could look to port an existing mortgage, or, alternatively, you could re-mortgage. Re-mortgaging could give you thousands off in interest if you can bag a more attractive rate, so it’s worth a look. If you own your home outright or are planning to rent, you’ll still have removal fees which can be as high as £1.5k, so shop around.

Other costs that might apply

• In addition to the standard costs, you may have some of these:
• Costs to kennel a dog or hire a dog-sitter during moving day
• Childcare costs on moving day
• Takeaway, delivery, or restaurant costs on moving day
• Increased fuel costs due to longer commutes
• Renovations required in your new home
• TV license fees (if you have one)
• Increased utility, council tax or other bills
• Any parking, pest control, or cleaning costs unaccounted for
• Bespoke insurance products
• If not bringing all your items, storage costs
• Cost of buying new appliances and furniture

How can you prepare?

The best way to prepare is to have a formal budget set up for your house selling project. Making it formal makes it serious, and that’s a good thing. Take all the cost items above and put them as budget line items. Allocate savings to each item if they apply to you; and where savings don’t currently cover it, estimate the time to save. There are loads of free tools for budget-planning spreadsheet and paper methods available online with a quick search.

If you’re struggling to save, the Money Advice Service says, “if you’re spending more than you have coming in, you need to work out where you can cut back. This could be as easy as making your lunch at home, or cancelling a gym membership you don’t use. You could also keep a spending diary and keep a note of everything you buy in a month. Or, if you do most of your spending with a bank card, look at last month’s bank statement and work out where your money is going.”

How can you keep track of costs?

Before, during and after the sale, use your budget planner to track your outgoings. You’ll notice that sometimes the actual costs are lower than what you thought they would be. (That’s great, and likely means you created a conservative budget.) If there are some excesses, make note. If it looks like you’ll finish with a negative variance, look for a line item you can cut to make up for the difference. If you track your actuals in this way, you’ll stay on top of your house selling spend from beginning to end.

Ready to start the sales process and need a top conveyancer by your side? We’d love to help. Our search tool is fast, free, and easy way to find an expert conveyancer near you.