Mortgages & Home Finance Self Build Mortgages: The Guide

Date Published:

30/09/2008

How A Self Build Mortgage Works

Self build loans work in a different way to regular mortgages. The main difference is the lender releases funds in stages. There are two ways the money from a self build mortgage can be released during the build – at the end of each stage, known as the ‘arrears stage system’ or at the start of each stage, know as the ‘advance stage system’.

The Arrears Stage System

With the arrears system, lenders won’t release a penny until certain stages in the construction process have been completed. This varies from lender to lender but means that some won’t hand over any cash until the footings are in place, some will want the property to be up to the first floor level and some will want it roofed while others will not lend on the land purchase at all.

Each completed stage then has be to assessed by a surveyor before you can access further funds to help pay for the next stage. This can cause some self builders to experience cash-flow problems and delays with the build.

In addition, lenders offering this type of self build mortgage will typically only allow you to borrow 75 per cent of the costs during the build and will keep a retention on the loan amount until the property is completed.

Ideally you need to have a large cash sum up front for this type of self build mortgage to work.

The Advance Stage System

With the advance stage system, funds are released in advance of each building stage, so the self builder always has cash flow. Plus, there are no interim valuations to cause delays as the amount released at each stage is agreed with the lender at the outset of the project.

Lenders typically let you borrow 95 per cent of the total cost of buying and building your own home. So this system makes sense if you have no spare cash but want to get into self build.

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