Construction Mortgages

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Many budding future homeowners have great plans of building their own property; however, this can be both confusing and daunting if it’s something you’ve never done before. 

By following the information below, you will gain a better understanding of construction mortgages and the necessary steps you will need to take to apply for one.

What is a construction mortgage?

A construction mortgage is a short-term loan which covers the cost of building a home - the loan is paid directly from the lender to the builder after the work has been completed.

After the construction of the property has ended, you will begin repaying the loan to the lender.

What is a self build mortgage?

As the name suggests, a self-build mortgage is a loan you take out on a property that you are building yourself.

It is slightly different to a residential mortgage, as you receive funds from your loan during stages of the building process rather than one large lump sum. This reduces the risk to the lender as there is less chance of running out of money during the build. 

Funds can be released differently depending on the lender, but it’s likely you’ll receive the first instalment when you buy the land, and this will continue as the build progresses.

What classes as an unusual home?

To receive a standard mortgage, your home will likely be built from bricks and have a slate roof. However, if your home is not built from these materials, it may be classed as an unusual home.

Unusual homes include:

  • Flat roofs 

  • Thatched roofs

  • Homes with walls made of glass or concrete 

  • Steel or wooden frames

  • Barn conversions 

  • Listed buildings 

Can you get a mortgage on a non-standard construction property?

Yes, you can get a mortgage on non-standard construction properties. However, it isn’t as straightforward as a standard property, which is why you will need to find a specialist lender who offers non-standard construction mortgages. 

Lenders will categorise properties into standard and non-standard properties to reduce their risk, and they tend to have a general rule that non-standard properties are riskier and therefore, harder to finance.

Different lenders may have different criterias to fill, and may favour certain non-standard properties over others; so it’s worth choosing your lender carefully. 

This is where having a knowledgeable mortgage advisor, like ourselves, on hand is really key.

How do construction and self build mortgages work?

These mortgages work in a similar way to standard mortgages and, when you apply, lenders will still want to see evidence of your income, your credit history and personal circumstances, such as how well you’ve paid back loans in the past.

The main difference between these mortgages and standard mortgages is the perceived level of risk. The lender will likely view you as a high risk borrower, so you may have to put down a higher deposit and you may actually pay higher interest rates too.

What is the criteria for a self-build mortgage?

Lenders will approach giving out non-standard mortgages with caution and they will pay close attention to the surveyors' reports when deciding how risky it will be to lend on the property.

They will be looking at structural integrity of the building, as well as how much maintenance will be required. It may be a good idea to arrange your own surveys before the lender conducts theirs.

As well as property specific criterias, there are personal criterias which need to be satisfied too. These include:

  • Credit history: Having a good credit history will drastically increase your chances of being accepted for a self-build mortgage. You should check your history before applying and correct any mistakes too.
  • Affordability: Lenders will carry out multiple checks to make sure you can afford your mortgage.
  • Employment status: Lenders can favour those who are salaried employees rather than those who own a business or are self employed. This doesn’t mean you won’t be accepted if you are the latter, you will just have to show more evidence.

Can you get a mortgage for building work?

Yes, you can get a mortgage for building work but, again, it will be different from a standard mortgage.

How easy it is to find a mortgage will depend on the amount of building work which needs done and the current condition of the property. There are some checks you may want to do yourself before lenders view the property. 

You may not be able to get a mortgage for building work if:

  • The property is already derelict due to neglect 

  • The building is uninhabitable 

  • It needs a conversion 

Which lenders are best for construction mortgage loans?

We can help you find the best mortgage lender suitable to your specific needs and circumstances. As these are specialist mortgages, most mainstream lenders won’t be able to offer a mortgage during the construction of the property, but there are many lenders who specialise in this area.

Mortgage seekers often become confused and upset when receiving a quote from online construction mortgage calculators, as they do not take into account specific factors.

At Go2Mortgage, we take the time to understand critical elements of your mortgage application, and we will always find the best lender who will take into account crucial factors. 

How much deposit will I need for a self build mortgage?

The size of your deposit will depend on the lender, but you should ideally have a deposit of at least 25% of the total project value.

However, some lenders say they will lend up to 95% of the build and land costs

FAQs about Construction Mortgages

What are the advantages of a self-build mortgage?

  • Many people find the opportunity to save money - sourcing materials and doing work yourself where possible can cut costs.

  • The value of the house, once built, tends to hold significantly more value than the cost of the build.

  • Stamp duty doesn’t apply to the cost of building work or the property value once all the work is finished.

Why is it hard to get a mortgage on a concrete house?

The reason why it is harder to get a mortgage on a concrete house is because it is commonly classed as a non-standard building material, which means less lenders will be willing to approve your borrowing request.

Lenders may also view concrete houses as high risk due to the unknown maintenance required, as well as the potential difficulty reselling it compared to a traditional brick and mortar home. 

Are construction mortgage interest rates higher than standard mortgages?

Yes, construction mortgages interest rates are typically higher than standard mortgages. However, once the house is built and habitable, lenders may allow you to switch to a lower interest rate. 

Will I still have a self build mortgage when the building work is complete?

The initial self build mortgage will continue on completion of the build, just like a normal mortgage. However, as they normally have a higher interest rate than standard mortgages and you may have built extra value into the property, it can be beneficial to remortgage onto a standard mortgage when the property is finished.