How to finance your self-build

Apart from a lucky few, the majority of us will need to raise funds in order to finance a dream new build. There are plenty of different options available, depending on your circumstances, the type of project you’re undertaking, and how your building is constructed. Here, we’re looking at the differences between the different types of loan you can get, so you can get an idea of what’s right for you. This isn’t financial advice, and you should talk to an expert before borrowing any money.

There are various ways to fund a self- or custom-build:

• from savings or the sale of an existing property
• using a loan to release equity from an existing property
• a self-build mortgage
• with a loan from the government’s Help to Build Scheme

Or a combination of these.

Self vs custom build

The options available to you will differ based on whether you are embarking on a self-build or custom-build project. Self-build is the term for a project where you find your own plot, get an architect to design your building, and then either get a professional to manage the build for you or manage it yourself.

Custom build is a halfway house between self-build and buying a finished property. You buy a house that has already been planned and received planning permission, from a landowner who probably also has a builder already lined up to do the work. There may be designs for you to choose from, or you may buy a ‘shell’ that you can put your own stamp on through fixtures, fittings and spec of things like the bathroom and kitchen. It’s a good way to get a tailored, if not completely individual, property.

Self-build mortgages

The key difference between a self-build mortgage and a traditional one is that the funds in a self-build mortgage are released in stages as the build takes shape. This is to reduce the risk for the lender, so that they can see their money is being used to build an asset with value. The stages at which money is released are usually:

1. purchase of land
2. foundations
3. wall plate level/timber frame up
4. wind and watertight
5. first fix
6. second fix

When signing up for your mortgage you need to have a very clear understanding with your mortgage provider about when you will get each tranche of money, how much it will be, and what you will need to provide to release the cash.

Cost-based or value-based

Depending on the mortgage, the percentage paid out at each stage reflects either a percentage of the cost of the project or of its final value. The former is a cost-based mortgage, the latter valuation-based.

In a valuation mortgage, the lender will get your project valued at the end of each stage of the build and then allow you to draw down a proportion of its assessed value. This can be extremely stressful as you never know in advance what the valuation will be, and, therefore, how much money you will get.

To solve this problem, many self-build mortgages are now cost-based, which gives the homebuilder the confidence that their outlay will be covered in full at each stage as the build progresses. Lenders may cover up to as much as 95% of the total project cost, and the schedule for the release of the cash is agreed upon when you sign up for the mortgage. This does rely on you having accurate costings and sticking to them – a quantity surveyor could be a valuable asset here.

Arrears or advance?

In a traditional self-build mortgage, the money for each stage is paid after that stage has been completed. This is called an ‘arrears stage payment’ mortgage, and it means you have to front up the money for each stage of the build as you go along before getting reimbursed. This can be tricky unless you have a lot of savings. It can be particularly difficult if the costs of your project are front-loaded because, say, you need to pay for an expensive timber frame before it is delivered to the site.

To deal with this problem, now you can get a mortgage where the money for each stage is paid in advance. This helpful ‘advance stage payment’ model was developed by self-build portal BuildStore, with its Accelerator mortgage. Advance stage payment mortgages are cost-based. After each stage of work is completed, you will have to give proof of what you have done to the lender in the form of a report from your professional consultant, photographs of the work done, Building Regs sign off, and so on.

How much can I borrow?

Just as it does with a standard mortgage, the total amount you can borrow depends not just on the value of the house you want to build but on your income, outgoings, existing borrowing, etc. You could be lent four and half times your income. However, the exact income multiplier varies according to the lender and the state of the market. It helps if you have a decent amount of money for the deposit. (If you don’t, the government’s Help to Build scheme, see below, might work for you.)

Brokers

If you are self-employed or think for some reason you might find it tricky to get a mortgage – perhaps your credit record is less than perfect, or you want to renovate a building made of non-standard construction – you could try one of the specialist self-build mortgage brokers who advertise in Grand Designs and the other self-build magazines. Just make sure they are registered with the Financial Conduct Authority.

Mortgage products

The nearest thing to a comparison site for self-build mortgages is BuildStore. Many of the lenders in the self-build market are mutual building societies. Lenders offering mortgages at the moment include:

• the Bath Building Society
• the Beverley Building Society
• the Buckinghamshire Building Society
• the Chorley Building Society
• the Darlington Building Society
• the Earl Shilton Building Society
• the Hanley Building Society
• the Hinckley and Rugby Building Society
• the Furness Building Society
• the Mansfield Building Society
• the Melton Building Society
• the Saffron Building Society
• the Tipton and Cosley Building Society
• the Vernon Building Society

Many of these mortgages are available exclusively through BuildStore. There are currently 60 mortgage options available there for up to 95% of project cost (100% if you already own the plot) or 85% of the final project value, on loans of £50,000 to £1m. The idea is that these smaller mutual companies will take a more personal, individual approach to qualifying borrowers, which is better suited to the bespoke nature of self-build than the algorithm-driven ‘computer says no’ approach of larger lenders.

The Ecology Building Society, meanwhile, has a good reputation for funding innovative green builds that other lenders won’t consider.

Lenders will usually want the project to be supervised by a qualified construction industry professional and/or covered by a building warranty scheme. You will need to stick to the plans the lenders have lent against and not change them as you go along.

Land purchase

You can buy your land with a self-build mortgage, but it will probably need to have planning permission of some sort, and the cost will need to be accommodated within your lender’s loan-to-value (LTV) ratio.

Interest rates

Current interest rates for self-build mortgages are around 6.5-7%. But you don’t need to get too hung up on the rate because you can transfer to a standard mortgage once your house is finished, though there may be an early repayment fee to pay.

Also, for many of the specialist self-build mortgages, you pay interest only while building your home, and only on the amount you have already received. And these specialist lenders tend to look more kindly than mainstream lenders on the idea of you staying in your current home while the work on your new place is carried out. So, you might even be able to avoid the infamous ‘caravan stage’ of the build.

Help to Build

The government’s Help to Build scheme has been around since 2022, with an initial plan of running for four years and budget of £150 million. It aims to promote self-building, which remains relatively uncommon in this country in comparison with pretty much everywhere else in the world.

The scheme offers government-backed equity loans to people in England who want to commission or self-build their own home. The aim is to help people who might not otherwise have considered it to build their own home, even if they only have as little as a 5% deposit. The loan can be for between 5% and 20% (40% in London) of the total estimated cost of the project. You can apply for Help to Build if you:

• are 18 or over, and have the right to live in England
• will live in the house as your only home
• secure a self-build mortgage from a lender registered with Help to Build

The self-build mortgage covers the plot cost (if you don’t already have one – you can take our advice on how to find the perfect plot) and the build. Meanwhile, the government pays the equity loan to your mortgage company, which reduces the size of your mortgage.

At the end of your build, you switch to a repayment mortgage, and the equity loan starts then too. The government’s agency Homes England ends up owning a proportion of the equity in your finished home. You pay no interest on the equity loan for five years, after that, you pay a low interest rate that goes up slightly each year. You can pay back the equity loan:

• at the end of the term, which is usually 25 years
• when you sell your house
• when you pay off your repayment mortgage

You can pay it off in part or full at any point. The amount you pay is based on the market value of your home at the time you repay it. So, if your original equity loan was for 20% of your house, and the value of your property goes up, you will repay 20% of the higher valuation. Full regulations and information explain everything.

There is a similar scheme in Wales, Self Build Wales – which seems to have awarded few grants as yet – and another in Scotland: the Scotland Self-Build Loan Fund.

Accurate costs

However you aim to fund your build, it’s really important you set out with accurately costed plans. Our article about quantity surveyors explains how a member of that profession could help you achieve that up front. It is particularly vital to get your costings right if you are going for an advance stage payment mortgage.

Documentation

Before making you a formal offer, your lender will want lots of information about your project as well as your personal finances. This could include: planning permission, drawings and plans, detailed costings, as well as the usual information about your finances.

Bridging finance

There may be a situation where you need money fast – to secure a property or piece of land, to pay contractors or a tax bill – while you are waiting for funds that you know are coming. That’s where a bridging loan could come in. You can get the money in a week to a month and a less-than-perfect credit history probably won’t be an impediment to getting a bridging loan. They have their place, but bridging loans are a very expensive form of short-term credit so you should always approach with caution and have a sound exit strategy in place.

Tax

One of the advantages of building your own home is that you can avoid paying Stamp Duty, although it is payable on land over £125,000 in value. You can claim back VAT you have paid on materials and services for a self-build via the DIY Housebuilders Scheme. Another tax issue to consider is the potential necessity of paying Capital Gains Tax on any profit if you sell a rental or inherited property to put equity towards a build. As ever with all financial matters, a good accountant with whom you can discuss these things is worth their weight in gold.