Lite Mortgages > Self-Build Mortgages

Self-Build Mortgages

A self-build mortgage is a specialised type of financing designed for individuals who want to construct their own home from scratch. Unlike a traditional mortgage, where the funds are released in a single lump sum at the completion of the sale, a self-build mortgage releases money in stages as the build progresses.

This could be at key points such as after the purchase of land, once the foundations are laid, or upon completion of the roof. This method reduces the risk for the lender and can also help the borrower to manage their budget effectively throughout the project. However, it’s important to note that self-build mortgages often come with higher interest rates compared to standard mortgages due to the increased risk involved.

We are here to guide you through the intricacies of self-build mortgages, helping you secure the financing you need to build the home you’ve always envisioned.

Mortgage Advice on Self-Build Mortgages

As someone who wishes to find out about self-build mortgages, you will probably have a lot of questions and concerns regarding the different types of self-build mortgages available.

By having an initial discussion with one of our team, we can answer your questions and guide you through the process to make sure you can move forward with confidence – contact us today.

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    Who are PLS Financial Services?

    Lite Mortgages is a business introducer for PLS Financial Services Ltd, an authorised firm regulated by the Financial Conduct Authority (FCA). With over 15 years of experience as an independent broker, PLS offer a comprehensive range of mortgage services for all types of borrowers and provide free initial mortgage advice.

    Their dedicated mortgage brokers are available five days a week, ready to guide you through the application process. With friendly, honest advice and access to a wide range of mortgage products, they provide personalised financial advice to help you attain the best mortgage solution possible by providing the most competitive mortgage deal, tailored to your needs and circumstances.

    Why use PLS Financial Services?

    A family of five embraces each other in front of a two-story house with a visible brick facade.
    Remortgaging, purchasing or moving home comes with its share of tasks and to-do lists. PLS Financial Services help handle the complexities of mortgage process, allowing you to focus on settling into your new space. We will guide you through every step, from assessing your affordability to finding the best mortgage rates.
    PLS Financial Services Ltd is a whole-of-market independent mortgage advisers. This means they can access to the entire range of products available in the mortgage market which enables them to find the best products for every type of buyer.
    Beyond securing your mortgage, PLS Financial Services provide comprehensive financial guidance. They analyse the costs associated with your move and help you make informed decisions that align with your long-term financial objectives.
    You can avoid the hassle of navigating the mortgage market on your own. We are committed to saving you time, effort, and money.
    The relationship doesn’t end with your mortgage. We are here to assist you with any future mortgage, or financial advice on setting up or reviewing pensions, savings or investments. We’re just a call away.  

    What are the types of self build mortgages available?

     Self build mortgages release funds at set stages during a project, and there are two main types of self build mortgages: arrears and advance.

    Arrear mortgages release funds after each stage of the build has been completed, while advance mortgages release funds before each stage of the build.

    Arrear mortgages can be further divided into two types:

    Advance mortgages are typically cost-based and release funds before each stage of the build.

    What is the minimum deposit required for a self build mortgage? 

    The minimum deposit required for a self build mortgage is typically 25% of the total cost of the build.

    What are the key considerations for a self build mortgage application? 

    For a self build mortgage application, you will need to provide plans and a breakdown of your build costs, including your plot cost. It’s wise to add on a contingency fund for any problems you may encounter further into the build too. The interest rates are typically higher than the standard house mortgage or remortgage rates and the arrangement fees also vary from lender to lender.

    What fees can be involved in a self-build mortgage?

    A mortgage valuation fee is a charge that covers the cost of assessing the value of the property you plan to purchase. This assessment, known as a mortgage valuation, is carried out by a certified surveyor or determined using an Automated Valuation Model (AVM). The objective of this valuation is to validate the property’s value and confirm if it qualifies as suitable collateral for the mortgage you’ve applied for.

    The cost of the valuation survey varies depending on the lender and the purchase price of the property. You should budget approximately £300 for this expense, but it could be higher if you’re purchasing a high-value property. In some cases, the lender might include the valuation at no additional cost.

    It’s crucial to understand that this valuation is conducted solely for the lender’s benefit and for mortgage lending purposes, not for yours. It’s distinct from other valuations that you can arrange separately, such as:

    • Homebuyer’s Survey (RICS Level 2 Survey or Homebuyer Report): This is a mid-level survey that’s popular among individuals purchasing a conventional property in a reasonable condition. It includes a visual inspection of all major indoor features, such as ceilings, walls, bathrooms, and permanent outdoor structures and features, including roofing and gutters. The report you receive will provide advice on any necessary repairs and the amount of ongoing maintenance required in the future.
    • Full Structural Survey (RICS Building Survey): This is the most comprehensive home survey and is suitable for older or unusual properties, as well as those that have undergone significant modifications in the past. It offers an in-depth analysis of the property’s structure and condition. The cost of a structural survey depends on the size, condition, and location of the house.

    A booking fee, sometimes referred to as an application or reservation fee, is a charge that certain lenders impose when you apply for a mortgage. This fee is utilised to secure the loan during the processing of your application. It typically ranges from £100 to £300 and is required to be paid upfront. However, it’s worth noting that this fee is not common with most mortgage deals.

    A telegraphic transfer fee, also known as the CHAPS (Clearing House Automated Payment System) fee, is a charge associated with a mortgage. This fee is intended to cover the costs your mortgage lender incurs when transferring the mortgage funds to the seller’s solicitor, thereby facilitating a same-day transfer between banks.

    This fee is typically paid when you are ready to finalize the deal. It is commonly either added to the total mortgage amount or deducted from the balance received. The cost for this service generally ranges from £25 to £50.

    When you use a mortgage broker, you may need to pay a fee for their services, which include arranging the mortgage and providing advice. However, the specifics can vary. Some brokers charge a fixed fee and others charge a percentage of the loan amount.

    If you repay your mortgage during a fixed rate tie-in period, you might have to pay an early repayment charge. This is usually a percentage of the mortgage amount outstanding, which will reduce yearly increments until the fixed rate expires.

    Once you’ve repaid your mortgage balance, you might have to pay an exit fee to your existing lender. This fee, also known as a discharge fee, is what you pay to close your mortgage account. The fee can be anywhere from £0 to £300.

    The average solicitor fees for buying and selling a house in the UK can vary depending on the complexity of the transaction, the value of the property, and the location. According to a recent study, the legal costs associated with buying and selling a home are generally around £1,000 – £1,800. There will also be additional costs such as disbursements and other costs associated with local searches which could cost you around £250 – £350 when purchasing a property.

    It is important to note that these are just estimates and the actual cost will depend on various factors. It is recommended to obtain a detailed quote from your solicitor or conveyancer before proceeding to ensure you fully understand all the associated costs. A mortgage broker at PLS can help you with this! If you wish to learn more about the different steps involved in the process of moving home, explore our blog post. It aims to simplify the conveyancing process for you.

    The cost is often overlooked. It is advisable to gather quotes from a variety of companies in your local area. Typically, the average cost of moving from a 3-bedroom house to a new residence situated 50 miles away is around £1,181.

    This tax usually has to be paid whenever you buy a property in the UK. But how much you pay depends on your personal circumstances, the property price, and where your home is in the UK. Use our Stamp Duty Calculator to find out how much may be owed in your specific situation.

    An estate agent fee is a payment you make for the services an estate agent provides when you sell a property. These services typically encompass a property valuation, the creation of a written description and floor plans, professional photography of your home, marketing efforts, viewings organization, and sale price negotiation.

    This fee is generally a percentage of your home’s sale price, payable once the property is sold. In the UK, estate agent fees can vary significantly, typically ranging from 0.9% to 3.6%. As of 2024, the average estate agent fee, including VAT, is approximately 1.42%. To illustrate, for a house priced at £275,000, the estate agent fees would be around £3,900.

    It’s worth noting that some estate agents offer flat-fee rates as an alternative to a percentage-based fee. It’s always advisable to compare the available options and consult with several estate agents to understand what their fee includes.

    Frequently asked questions

    Yes, you can get a mortgage if you have irregular income, but the reason for the irregularity is important. Here are a few guidelines:

    As an employed person with a permanent contract, mortgage lenders will verify your annual basic salary and use an average of any regular overtime, commission or bonus (usually for 3 months).

    If you have no minimum guaranteed working hours, the average used will depend on the lender and all will require a minimum employment history of 12 months in the same job role.

    If you are self-employed, mortgage lenders will require a minimum 12 months trading and one year’s accounts. The self-employed income declared for tax purposes on an SA302/tax calculation will be used. Most mortgage lenders will use an average of the latest 2 years self-employed figures or the latest years if it is lower.

    If you are a limited company director or have a large shareholding you will also be treated as self-employed. Similar to above, the lenders will require a minimum 12 months trading and one year’s accounts. The self-employed income being salary + dividends or net profit declared for tax purposes on your SA302/tax calculation and final certified company accounts can be used.

    For more information regarding your own individual circumstance, speak to a mortgage adviser today.

    An individuals credit score plays a crucial role in determining your ability to get a mortgage. This is due to mainstream lenders using your credit score, among other factors, to assess your creditworthiness and the level of risk associated with lending you money for a mortgage. However, it is important to note, mortgage lenders will have their own in-house scoring systems you will need to pass and this is when our experience and knowledge will help massively.

    Here’s how your credit score impacts your ability to get a mortgage:

    1. Eligibility: A good credit score increases your chances of being eligible for a mortgage. Lenders typically have minimum credit score requirements, and if your score falls below that threshold, it may be challenging to qualify for a mortgage.
    2. Interest Rates: Your credit score affects the interest rate you’ll be offered on your mortgage. A higher credit score usually leads to better interest rates, meaning you could potentially save a significant amount of money over the life of the loan with a lower interest rate.
    3. Loan Amount: A higher credit score may allow you to borrow a larger loan amount. Lenders may be more willing to offer higher loan amounts to individuals with strong credit histories.
    4. Deposit Requirements: A low credit score might lead to higher down payment requirements. Lenders may ask for a larger down payment to mitigate the risk of lending to someone with a less favourable credit history.
    5. Mortgage Approval: Lenders thoroughly assess your credit report and credit score to determine if you’re a reliable borrower. A history of missed payments, defaults, or bankruptcy could result in mortgage application being declined.

    To improve your chances of getting a mortgage with favourable terms, it’s essential to maintain a good credit score. You can do this by:

    • Paying bills on time: Avoid late payments on credit cards, loans, and other bills.
    • Managing credit utilization: Keep your credit card balances low relative to your credit limits.
    • Reducing outstanding debts: Pay down existing debts to improve your credit utilization ratio.
    • Avoiding unnecessary credit applications: Multiple credit applications in a short period can negatively impact your score.

    Before applying for a mortgage, it’s a good idea to review your credit report for accuracy and address any discrepancies or negative marks.

    The good news is even with a poor credit score or adverse credit, there are specialist mortgage lenders who can look to help and do not credit score. Instead, will have set lending criteria you will need to meet, which is why the credit report is important in this situation.

    There are several types of mortgage interest rates available to borrowers. Each type offers different advantages and considerations. The main types of mortgage interest rates include:

    1. Fixed-Rate Mortgage: The interest rate stays the same for a certain period (usually 2-10 years), making your monthly payments predictable.
    2. Tracker Mortgage: The interest rate follows a specific economic indicator (usually the Bank of England’s base rate). Your mortgage rate and payments will change if the base rate does.
    3. Standard Variable Rate (SVR) Mortgage: This is the lender’s default rate that you switch to after the initial rate period. The lender can change the SVR, so your payments can vary.
    4. Discounted Rate Mortgage: This offers a lower interest rate for a set period (usually 2-3 years). The rate is a discount below the SVR.
    5. Capped Rate Mortgage: Similar to a fixed-rate mortgage, but there’s a limit to how high the rate can go. This protects you from big rate increases but lets you benefit if rates drop.
    6. Offset Mortgage: This links your savings and current account balances to your mortgage debt. The interest you owe is based on your mortgage balance minus your account balances, which can reduce your interest payments.

    Each type of mortgage interest rate has its pros and cons, and the most suitable option for you will depend on your individual financial circumstances, risk tolerance, and preferences for stability or flexibility. This is why it is important to speak to a mortgage adviser at PLS Financial Services today.

    An Agreement in Principle (AIP) and a Formal Mortgage Offer are two distinct stages in the mortgage application process, each serving a different purpose. Let’s understand the difference between them:

    1. Mortgage Agreement in Principle (AIP):

    An Agreement in Principle (AIP) is also commonly known as a Decision in Principle (DIP) or a Mortgage in Principle (MIP). It is a preliminary indication from a lender of how much they may be willing to lend you based on an initial assessment of your financial situation. The AIP helps you get an idea of your borrowing potential before making an offer on a property.

    To obtain an AIP, you typically provide basic financial information to the lender, such as your income, employment status, and existing debts. The lender then performs a soft credit check (a check that does not impact your credit score) to assess your creditworthiness. Based on this initial assessment, the lender offers an indication of the amount they may be willing to lend you.

    An AIP does not guarantee that you will receive a formal mortgage offer. It is only an indication of the lender’s potential willingness to lend, subject to further verification and a full mortgage application.

    2. Formal Mortgage Offer:

    A formal mortgage offer is issued by the lender once they have completed a comprehensive assessment of your application. It sets out the specific terms and conditions of the mortgage, including the loan amount, interest rate, repayment schedule, and any special conditions.

    To receive a formal mortgage offer, you must submit a complete mortgage application to the lender. The lender will then conduct a more detailed assessment, including a thorough credit check, verification of your income and financial documentation, and other relevant checks. Once they are satisfied with your application and all necessary checks, they issue the formal mortgage offer.

    A mortgage offer or principle is not a legally binding contract. The lender still has the right to withdraw the offer, although this is rare. It is important to read the offer carefully and understand the conditions stated. Your solicitor will sort out all of the legal steps involved in purchasing a new property, known as conveyancing – see our blog on the conveyancing process here.

    The process of buying a house becomes legally binding at the exchange of contracts stage. This is when both the buyer and seller are legally committed to the sale. After contracts are exchanged, the seller must sell, and the buyer must buy at the agreed price. If either party pulls out after this point, they could face serious legal consequences.

    Before this stage, either party can withdraw from the sale without any major legal implications. However, once contracts are exchanged, pulling out of the transaction could result in the loss of the deposit, and the party in breach may be sued.

    It’s important to note that the exchange of contracts is usually handled by solicitors and often takes place a few weeks before completion. The completion date, which is when the property officially changes ownership and the money is transferred, is usually set for a specific date during the exchange of contracts.

    Residential:
    The amount you can borrow for a mortgage depends on several factors, including your income, credit history, monthly expenses, and the lender’s criteria. Typically, lenders use an affordability assessment to determine the maximum loan amount they can offer you. This assessment ensures that you can comfortably manage mortgage repayments without undue financial strain.

    Most lenders consider a loan-to-income (LTI) ratio of up to 4.5. This means that they will typically lend up to 4.5 times your gross annual income. However, some lenders may offer higher LTI ratios for certain borrowers or circumstances.

    To get a rough idea of how much you might be able to borrow, you can follow these steps:

    1. Determine your gross annual income (before tax and deductions).
    2. Multiply your gross annual income by the LTI ratio (usually 4.5).

    For example, if your gross annual income is £40,000, the rough estimate of the maximum mortgage you might be able to borrow would be 40,000 x 4.5 = £180,000.

    It’s important to note that this is a simplified calculation, and actual borrowing capacity can vary significantly based on individual circumstances, such as credit score, existing debts, monthly expenses, and lender policies. Additionally, some lenders may consider other factors, such as bonuses, overtime, or self-employed income, when calculating your borrowing capacity.

    Buy-to-Let:
    For buy-to-let mortgages, stress testing is carried out, but with additional considerations. Lenders typically assess rental income as well as the borrower’s personal income and will use the rental income to determine the maximum borrowing amount available. The stress test usually includes verifying that the rental income can cover the mortgage payments even if interest rates increase. The required rental coverage varies, but lenders may often require rental income to be around 125% to 145% of the mortgage payments.