Self-build loans – commonly referred to as construction loans – are ideal for those who are embarking on the rewarding long-term project of building their own house. This specialised mortgage is tailored to your project’s requirements.
While this type of mortgage and build is still a relative rarity in the UK, mainland Europe has shown that this approach to home-owning can work. The city of Almere in Netherlands, for example, has placed a focus on custom builds and has become one of the fastest-growing cities in Europe as a result. In essence, custom and self-builds could be the future.
Self-build mortgages are typically bespoke to your project’s needs, yet broadly-speaking, each house building loan comes with common advantages and disadvantages.
Advantages of a Self-Builds
The most obvious advantage of a self-build is you can create a perfect home for your needs, money allowing. There is no sense of compromise as the entirety of your build can be bespoke to your needs. From the floor plan to energy savers to storage, you can build a home that suits your lifestyle to minute detail.
Typically, assuming the housing project is managed correctly, when factoring in savings, you’ll commonly pay less for building a home compared to similar builds. That way, you can borrow less from the lender.
A self-build comes with certain stamp duty savings, too, as there is no stamp duty charges on building work. Stamp duty is only charged to the value of the plot of land you purchase if it exceeds £125,000, not building costs.
Disadvantages of Self-Build Mortgages
The disadvantages of a self-build tend to revolve around hashing out the correct mortgage for both you and your lender.
Usually, mortgage funds are released in stages during a self-build, meaning the borrower can sometimes run into cash flow problems mid-project. This can sometimes mean additional borrowing from outside sources and bankrolling project work from savings.
Before attaining the mortgage, borrowers will need to get a lot of factors in place. Lenders will need to see evidence of planning permission, which is commonly a piecemeal process that can easily fall into legal and administrative stumbling blocks. The need for planning permission is symptomatic of self-build mortgages slower pace; it’s much faster to purchase a home, meaning borrowers can live through the opening months and years of the mortgage with their life on hold.
Given the higher probability of things going wrong during a self-build, the lender is at greater risk. This increased risk is reflected in interest rates, which are higher for a self-build. Certain repayment conditions and limitations may be bundled in with the loan, too, all for the sake of reducing the risk to the lender.
Lenders may request certain materials and building practices to be used in order to minimise this risk, which may negatively impact the borrower’s ambitions.
Should you Opt for a Self-Build Mortgage?
Building and living in your own home is a dream for many for obvious reasons; nothing can replace building a home designed around you and your lifestyle.
However, given the increased risk to lenders, it’s only worth opting for a self-build mortgage if you have significant savings to bridge the gap in cash flow issues, as well as a safety net to pay for increasing rates.
Looking to Build your own Home?
If you’re encouraged by the advantages of self-build mortgages, then our friendly and experienced mortgage brokers can help. Get in touch with us today to learn more about house building and construction loans.