Self-build mortgages represent a significant part of the mortgage market, though not every lender offers them — self-build projects have a mixed history on lenders' books, with cost overruns and delays a common feature. This guide should help.
Self-build mortgages are mortgage facilities arranged for individuals building their own home. This category covers both direct-labour construction and houses built by contractors under a building agreement.
Building your own home isn't for everybody, but in almost all circumstances it results in lower house purchase costs compared with a ready-built house. The process generally takes considerably longer than anticipated and requires a great deal of planning — hiring the right professionals is vital, and an experienced project manager will usually pay for themselves.
The self-build process involves acquiring a site, obtaining planning permission, and constructing the property. A number of newer lenders — including Avant Money, ICS Mortgages and Finance Ireland — do not currently offer self-build mortgages, and lenders in general are reluctant to advance facilities where the site exceeds what can reasonably be described as a house plot.
Key issues in self-build mortgages
The first step is establishing what you can afford and getting approval for the cost of your development. Lending criteria for self-builds is strict — lenders have had poor experiences in this area, with houses left unfinished due to inadequate budgeting or changes in circumstances. As a guide, lenders are more comfortable when:
- Facilities required do not exceed 3.5 times gross income
- You have savings (cash) of around 10% of the value on completion
- Employment is permanent and secure
The next step is talking to an architect or building engineer in the area where you intend to build, to establish an approximate site and building cost within your borrowing capacity — always budget for cost overruns in the region of 15%.
Banks will not issue funding until planning permission is in place, and will not fund the cost of obtaining planning permission or connecting to services (water, mains, etc.). Lenders will typically advance up to 70% of the cost of buying the site and 100% of the building cost, but never more than 100% of the construction cost regardless of the value on completion.
Deciding how you'll build
Direct labour — the client, under the supervision of an appointed architect, manages every element of the build from sewerage, drainage and foundations right through to plastering and fitted kitchens. This is a difficult undertaking requiring real dedication and control.
Building contract — the house is built under the supervision of an approved architect, but the work and project management is subcontracted in full to a builder, generally chosen following a tender process organised by the architect.
In both cases, the key to success is your satisfaction with the ability of everyone involved — architect, builder or direct-labour tradespeople — to deliver professionally and efficiently. Employ experienced, reliable people and thoroughly check their references.
Lending criteria and drawdown
When assessing a self-build application, lenders apply broadly the same rules as for a straight house purchase — they need to be satisfied you can comfortably afford the repayments.
Paying for the site — funding of the site purchase is the first stage. The site must have outline planning permission, and as a guide the maximum funds available at the outset is 70% of the site purchase price.
Stage payments — funds are drawn down in stages by your solicitor, so money is available to the builder (or for direct labour) during construction. No funds are advanced unless the stage of development has been certified by a suitably qualified architect or engineer, and the lender will satisfy itself as to the qualifications and professional indemnity insurance of your appointed architect at the outset.
Construction insurance — special buildings-under-construction insurance is required during the build, which your architect will advise on.
Be prepared for the unexpected
The importance of project planning can't be overstated in a self-build. You need to be involved from the start and take a hands-on approach — and if you're building jointly with a partner, decide at the outset who is taking prime responsibility for the build.
