Self-Build Mortgages and Alternative Finance For Your New Home

Self-Build Mortgage

A standard mortgage won't typically be an option if you want to build your own home. Instead, you may need to secure a specialised self-build mortgage or alternative finance. But what are these finance options, and how can they be used?

Channel 4's Grand Designs programme and shows like DIY SOS have inspired a growing number. In 2022, 63,662 people chose to build their own homes, many of whom were self-builders. If you're exploring ways to build your own homes, whether contemporary or standard, you'll eventually get to the money question: “How can I finance my self-build?”

This article will cover the different types of self-build properties and their financing options, providing a clear overview of your project and the next steps.


What is Self-Build?

A “self-build”, also known as a custom build, is when you build or commission a house to be built from the ground up on land you own. This allows you complete control over the design and construction, including the size, layout and materials used.

What are the benefits of Self-Build? 

Building your property provides at least 8 key benefits over buying a built property.

  1. Cost Savings: First and foremost - the big one. It's cheaper to build than buy. Building your own home can be more affordable than buying an existing property, as you can eliminate developer profits and control the budget. There are also short-term savings, such as saving 100% of VAT.
  2. Customisation: You have the freedom to design and customize your home to suit your specific needs, preferences, and lifestyle, ensuring it perfectly matches your vision and needs. This is where the cost savings can be reversed if you're not disciplined or have particularly expensive tastes.
  3. Quality Control: You can choose the materials and oversee the construction process, ensuring workmanship and materials used are high-quality or ethically sourced.
  4. Energy Efficiency: You can incorporate the latest energy-efficient technologies and materials, potentially reducing long-term energy costs and environmental impact.
  5. Location Choice: Self-building allows you to select the exact location, plot of land and building orientation that suits your brief.
  6. Personal Satisfaction: Completing a self-build project provides a sense of accomplishment and pride, as you have a direct hand in creating your home.
  7. Investment Potential: A well-executed self-build can begin by giving you a substantial equity amount in your new home (the money you've saved by not buying from a developer). It'll also increase in value over the long term, and this combination should provide you with a good return on investment.
  8. Reduced Competition: In areas with high property demand, self-build can be a way to secure a home without competing in a competitive housing market.

What are the challenges of Self-Build?

Managing your self-build project will come with challenges. While it initially seems appealing, offering complete control and a sense of accomplishment, it can quickly become overwhelming and become a Channel 4 documentary. Problems on site, issues with labour, adverse weather, difficulties financing, local planning, juggling the project management with a family or full-time job - there's a lot that can impact a self-build's success or failure. Self-build projects often stretch over several months or years, demanding considerable time, resources and dedication. Here are 3 key aspects to consider.

Risk management. Unanticipated costs and building issues can arise, potentially derailing your budget and timeline. The pressure of ensuring all construction complies with regulations and standards is necessary, requiring attention to detail.

Time and commitment. Self-building demands a substantial time commitment. Coordinating with architects, builders, and contractors requires constant attention and availability. Delays are common, whether due to weather, supply chain issues, or other unforeseen factors, requiring flexibility and resilience.

Regulatory issues. Each stage of construction must comply with local building regs, and failure to meet these standards can result in costly delays and modifications. Staying informed and proactive about these requirements is crucial.

How can financing Self-Builds be challenging?

Securing finance for a self-build is more difficult than obtaining a standard mortgage. Lenders often require detailed plans and proof of planning permission before approving funds. Additionally, self-build mortgages typically release funds in stages, which can create cash flow challenges. Unforeseen expenses can further strain your budget, making it essential to have a financial buffer to cover unexpected costs.


How can I finance a self-build?

One of the most frequently asked questions from potential self-builders is, "How can I afford it?" here are the top three ways you can finance your self-build project: self-build mortgages (advance and arrears), bridging loans and development finance. 

Self-build Mortgages    

Self-build mortgages release payments in stages throughout the construction process, unlike traditional residential mortgages, which typically provide a lump sum upon purchase completion. 

The two types of self-build mortgages available are advance and arrears self-build mortgages.

Advance self-build mortgage 

This type of mortgage releases funds at the beginning of each stage of the construction process. It provides the money upfront, helping you cover the costs before each phase begins. This makes it easier to manage cash flow and pay for materials and labour as needed.

Arrears self-build mortgage 

In this arrangement, funds are released after each stage of construction is completed. You must have available funds to cover the initial costs before reimbursement, meaning you finance each build phase upfront and then receive the funds from the lender afterwards.

How do you calculate the cost of a self-build mortgage?

There are certain aspects of the project that you’ll need to consider when getting a self-build mortgage; these include (but are not limited to).

  • Total project cost.
  • Determine the mortgage amount.
  • Interest Rate.
  • Mortgage type.
  • Monthly Payments.
  • Projected value of the property.

Bridging loans for self-build projects

Bridging loans offer more flexibility than self-build mortgages. Self-build bridging loans can be disbursed in a lump sum or instalments without needing inspections, making them ideal for self-build projects. Interest on these loans is often 'rolled up' and paid at the end of the term, allowing borrowers to allocate funds to construction rather than monthly payments.

These loans are secured against property assets, making them suitable for those with sufficient equity. Typically, lenders offer up to 80% loan-to-value (LTV) on residential property equity or up to 65% LTV on commercial property equity. Higher LTVs are possible if additional property is provided as security.

How much does a bridging loan cost?

Bridging loan costs usually include monthly interest and various fees. A bridging loan calculator can help estimate the total cost based on your needs and circumstances.

Development finance for self-build projects

Development finance usually comes in staged payments, which are released as each project phase is completed and inspected. This ensures that funds are available when needed and helps keep the project on track. Development finance often covers a wider scope of costs, including land purchase and construction fees.

How do you calculate the cost of development finance?

The costs of property development finance include interest payments and loan fees. Interest payments vary based on loan size, borrower creditworthiness, loan term, and loan type (short-term, long-term, fixed-rate).

The interest rate can also be influenced by the loan-to-gross-development-value (LTGDV), the percentage of the development's value that the lender is willing to finance.

Development finance also includes loan fees, including setup, application, and administrative costs. Understanding all associated expenses is key to securing finance; you can use a development loan calculator to estimate the costs for your project.

Bridging Loan Calculator

  • Bridging Loan Calculator
  • Bridging Loan Calculator
Bridging Loan Calculator
  1. Loan amount required

    The loan amount required is also known as the total 'net' loan amount that you want to borrow.

    This is the amount you are expecting to receive before interest or any other charges have been added.

  2. Loan term

    This is the number of months that you'd like the loan for.

  3. Type of loan required

    The type of bridging loan required can influence the maximum permitted borrowing amount based on LTV.

    For example a loan for use in development of land with planning permissions allows for an LTV of up to 70%, compared to a similar loan for use with land without planning permission which is only available up to an LTV of 50%.

  4. Properties used as security

    Please enter the number of properties that you'd like to use as security for the loan.

  5. Property 1: Value

    The current market value of the property being used as security.

  6. Property 1: Mortgage balance

    If you have any mortgages or other secured loans on this property please total the outstanding value here. Note: We only need to know the total loan existing balance that will still be outstanding upon receipt of the bridging loan, so if you're intending to take a bridging loan to consolidate those other mortgages etc then the balance outstanding upon receipt of the bridging loan would be 0.

  7. Interest rolled up or paid monthly?

    Rolled up interest means the interest is charged at the end of each month and then added to the loan balance. Another term for this is compounded monthly interest. This is the normal interest charging method for bridging loans. It's then paid when the loan is redeemed.

    Pay monthly means that the interest is charged and paid at the end of each month. Another term for this is serviced interest. It's not added to the loan facility.

Your Loan Example

Net loan amount -

Loan amount required before interest, fees or any other costs have been added.

Broker fees (2%)-

Calculated as a percentage of the net loan amount. Amount of broker fee is illustrated, and the percentage charged is shown in brackets.

Lender facility fee (2%) -

Calculated as a percentage of the net loan amount. Amount of facility fee is illustrated, and the percentage charged is shown in brackets.

Net loan including fees -

This is the net loan amount plus fees.

Monthly interest rate -

Monthly rate of interest charged on the loan facility.

Average monthly interest -

This is the average monthly amount of interest charged based on the full term of the loan. Interest is calculated on the loan balance each month and then added to the facility.

Interest if the loan runs the full term -

This is the total amount of interest that will be charged if the loan is cleared at the end of its term.

Loan to value (LTV) -

This is calculated using the loan amount plus any mortgages left in place, and the total value of the properties used as security.

Other fees

These fees are incorporated into 'Net loan including fees' shown above.

Valuation fees -

This is the estimated cost if a full valuation is required on the properties offered as security. This figure maybe reduced if a desktop, drive by or existing valuation is sufficient for the lender.

Lenders administration fee -

Most lenders charge administration fees, the amount of which can vary. The fee shown is for a typical plan.

Estimated lender legal costs -

Borrowers are required to pay all legal fees incurred in relation to arranging their loan.

CHAPS Fee -

Lenders are charged a CHAPS fee for sending the proceeds of the loan to their solicitor. They claim this charge back from the borrower.

Loan settlement

Redemption administration fee -

Lenders charge an admin fee to remove their charge over the property when a loan is repaid.

Exit fee (0%) -

Some loan plans have exit fees. Almost all of our loans do not.

Redemption amount at full term -

This is the estimated amount required to repay the loan if it runs the full term.


What are the types of self-builds, and which one is easier to finance?    

There are two main types of self-builds: contemporary and traditional. Traditional properties are much easier to finance. They are financed by traditional and alternative lenders, while contemporary properties, including non-standard construction (NSC) properties, typically require specialist lenders. 

Contemporary

Contemporary self-builds are characterised by modern architectural styles that emphasise clean lines (inspired by existing properties like huf haus and brutalist homes), open spaces, and innovative materials.

  • Flat roofs and large ‘wall’ windows.
  • Sustainable and eco-friendly features.
  • Open-plan layouts.
  • Innovative materials.

Examples of contemporary self-build projects in the UK include homes designed by renowned architects like Richard Rogers or Norman Foster, known for their modernist principles and sustainable building practices. Financing a contemporary self-build can vary depending on the design and materials chosen. While contemporary designs may incorporate high-end materials and eco-friendly technologies, they can also attract financing through specialised lenders or government schemes focused on sustainability and innovation in construction.

Sustainable (environmentally friendly)

These self-builds focus on environmental sustainability and energy efficiency. These projects prioritise eco-friendly building materials, renewable energy systems, and sustainable design principles aimed at minimising environmental impact. 

  1. Renewable energy. Renewable energy sources such as solar panels, wind turbines, or geothermal heating systems can be used to generate energy onsite.
  2. Recycled materials. We use sustainable materials like timber and recycled materials such as reclaimed wood or recycled glass in construction.

These ‘green’ self-builds will likely be financed through specialised lenders (due to the NSC element) or government incentives targeting sustainable construction practices. These projects may qualify for green mortgages, which offer favourable terms for environmentally friendly homes, or grants and subsidies to promote sustainable building initiatives. 

Traditional build

Traditional self-builds use standard construction methods and materials, featuring familiar architectural styles like Victorian, Georgian, or Tudor designs. Key characteristics include using conventional brick, slate, stone, and timber (BSST construction). These homes often feature pitched roofs, symmetrical facades, and other elements that reflect classical architectural principles. The construction methods are well-established and widely understood, emphasising detailed craftsmanship with ornate woodwork and stone masonry.


Non-standard construction materials and methods

Non-standard construction involves materials and techniques that deviate from traditional brick-and-mortar or stone buildings with slate or tiled roofs. “NSC modern architecture” is typically called contemporary architecture, modernist, avant-garde, or unique-design homes. 

Common NSC materials in self-builds

Six materials consistently appear in NSC properties: concrete, glass, metal, plastic, stone, and timber. Here, they are described in more detail, with examples of their use.

Concrete

Concrete has become popular for newly built properties inspired by the brutalist architecture movement. Brutalist homes are known for their bold, raw designs, showcasing exposed concrete with its natural texture. These homes often feature large, monolithic forms and geometric shapes.

An example of this is 3D-printed concrete. This involves using a large-scale 3D printer to extrude concrete in layers, creating complex shapes and structures. This innovative method allows for rapid construction, reduced material waste, and greater design flexibility. 3D-printed concrete is used for everything from residential homes to commercial buildings and infrastructure projects.

Glass    

Glass is increasingly used (not just for windows) as a primary material in modern construction due to its modern aesthetic and ability to create light-filled spaces. Structural glass, used in applications such as glass floors, stairs, and entire facades, can support significant loads while offering a sleek, transparent look. 

For example, ‘smart glass’ incorporates technology that can allow the glass to change its properties, such as tinting on demand to control light and heat transmission, enhancing energy efficiency. Insulated Glass Units (IGUs) are made from multiple glass panes separated by a spacer and sealed, providing better thermal insulation and reducing energy consumption.

Metal    

Steel frames provide robust structural support for homes, offering flexibility in design and faster construction times. Corten steel, known for its weathered look and resistance to corrosion, is used to create an ‘industrial look’ for residential properties. Aluminium, lightweight and resistant to corrosion, is used in window frames, cladding, and even structural components, contributing to residential buildings' modern look and longevity.

Using recycled materials in construction is a key strategy for reducing environmental impact and promoting sustainability. New building projects commonly use recycled steel, glass, and plastic. Recycled steel can be used for structural frameworks, while recycled glass is often found in windows and insulation. Recycled plastic can be transformed into building components such as composite lumber, roofing tiles, and insulation.

Plastic

Plastic materials are extensively used in construction and are particularly popular for flat roofs due to their durability, flexibility, and weather resistance. PVC (Polyvinyl Chloride) roofing membranes are particularly popular for flat roofs because they provide a robust, waterproof barrier resistant to UV radiation, chemicals, and fire.

They are also used for Structural Insulated Panels (SIPs). They consist of a rigid foam core sandwiched between two layers of structural board, usually oriented strand board (OSB). These panels are highly energy-efficient and provide superior insulation compared to traditional building methods. SIPs are used in walls, floors, and roofs, allowing quicker construction times and improved building energy performance.

Stone

Stone has been used in construction for millennia, but modern techniques have revitalised its application in non-standard residential construction. Engineered stone, composed of crushed stone bound by an adhesive, offers greater consistency and strength than natural stone and can be produced in various colours and patterns. It provides a durable and attractive option for countertops and flooring. 

For example, dry stone construction involves building without mortar, relying on carefully placing stones. This method is both traditional and sustainable. Stone cladding, thin layers of stone applied to the exterior of homes, provides the aesthetic of stone construction without the weight and cost of solid stone walls.

Timber

Timber is commonly used in standard construction for structural framing and roof trusses. Traditional timber frame construction, which uses wooden beams and posts, is still the standard in residential properties - but there are circumstances where using timber can be considered NSC.

An example of this is cross-laminated timber (CLT). CLT is an engineered wood product that layered timber in perpendicular directions. This material is increasingly popular for its sustainability, as it is made from renewable resources and has a lower carbon footprint than standard construction. CLT is used in various residential, commercial, and industrial applications, offering excellent strength and fire resistance.

What are some examples of Non-Standard Construction new builds?

Brutalist houses, or concrete houses, are highly sought after—for example, the ‘Outhouse Brockweir’ in Gloucestershire, appealing to those who admire the modernist design and 20th-century heritage. In the mid-20th century, Brutalist architecture was influenced by modernist principles and the post-war demand for efficient housing. Its name, derived from the French "béton brut," highlights its raw concrete aesthetic, characterised by massive forms, exposed surfaces, and open layouts fostering a sense of spaciousness and connection with surroundings.

Self-build mortgage for Brutalist house

In the UK, barn conversions are considered NSC because they originate as agricultural buildings with distinct materials and techniques - for example,’ The Cow Shed’ in Bishops Caundle, Dorset. Converting barns into homes typically requires significant alterations, such as adding insulation, modern utilities, and meeting building regulations. Unique features like timber framing, stone walls, open spaces, and exposed beams set them apart from standard homes and categorise them as NSC. 

Self-build mortgage for Barn Conversion

What are the benefits of using Non-Standard Construction for your new build?

Before buying or building a non-standard home, factors should be carefully considered to weigh the pros and cons and make an informed decision.

Unique appeal. Non-standard homes often feature unique architectural designs and materials, offering a distinctive aesthetic that stands out from traditional homes.

Environmental sustainability. Non-standard homes can incorporate eco-friendly features and materials, reducing environmental impact and promoting sustainability.

Flexibility in design. Non-standard construction allows for greater flexibility in design, enabling you to customise your living spaces according to their preferences and lifestyles. These designs typically attract more interest from cash buyers, meaning the property transaction will likely be quick.

What are the potential drawbacks of using Non-Standard Construction?

When considering non-standard construction, it's important to be aware of potential drawbacks, from higher maintenance to regulatory compliance. 

Higher maintenance costs. Non-standard homes may require specialised maintenance and repairs due to unconventional materials or construction techniques, leading to potentially higher costs over time.

Limited financing options. Securing financing for non-standard homes can be more challenging, as some lenders may hesitate to finance properties with unconventional construction methods. This is where alternative finance methods, like bridging loans, can purchase non-standard construction properties. 

Regulatory compliance. Non-standard construction may require special permits and regulatory approvals, adding complexity to the building process and potentially delaying construction timelines.


What alternative finance options are available for self-build projects?

From savings or the sale of an existing property

This provides immediate access to funds without incurring debt or interest payments, allowing individuals to finance the project independently. By leveraging savings or sale proceeds, homeowners can cover expenses such as purchasing land, materials, and labour costs without relying on external financing sources. Moreover, using personal funds demonstrates financial stability and a strong commitment to the project.

Using a loan to release equity from an existing property

Release equity from an existing property through a loan, such as a remortgage or obtaining a home equity loan. This approach allows homeowners to borrow against the value of their current property, accessing a substantial amount of capital for the self-build project. Loans secured against property equity typically offer lower interest rates than unsecured loans, making them a cost-effective means of financing.

Loan from the government’s Help to Build Scheme

The government's Help to Build Scheme offers a specialised loan program for self-build projects. Through this scheme, applicants can obtain an equity loan of 5% to 20% (or up to 40% in London) of the total estimated development cost. This loan can be used for expenses, including purchasing land (if not already owned) and building costs, up to a maximum of £600,000, with £400,000 allocated specifically for construction.

Eligibility criteria for a Help to Build loan include being over 18 years old, intending to occupy the home as your primary residence, possessing a minimum 5% deposit of land and building costs, and securing a 95% self-build mortgage from a Help to Build-registered lender.

To apply for the Help to Build scheme, you must secure a self-build mortgage from an approved lender, which you can find independently or through a broker. Applications can be submitted online, and you will receive your equity loan if approved. Repayment of the loan is based on the market value of your completed home, including the land value. Therefore, any increase in your home's value will affect the amount repayable.


Final thoughts

A self-build mortgage typically releases funds in stages based on site valuations, which can pose cash flow risks if the property is downvalued, leaving insufficient funds for ongoing expenses. Bridging loans and development finance offer alternatives by providing flexible funding arrangements without frequent valuations.

Bridging loans offer lump-sum or staged payments, while development finance ensures funds are released gradually with specific terms. Both are designed to support self-build projects effectively and mitigate financial uncertainties during construction.

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