How does a self-build mortgage work?

Full answer

A self-build mortgage finances the construction of a home you are building yourself (or with a builder), rather than buying a finished property. The defining feature is staged drawdown: instead of receiving the whole loan at completion, the lender releases the money in tranches as the project reaches agreed milestones -- typically the land purchase, foundations, wall plate, weathertight (roof on), first fix and completion. There are two release models. 'Arrears' (stage payments paid after each phase is finished and signed off) means you must fund each stage yourself first, then get reimbursed, so you need working capital or bridging finance. 'Advance' (also called accelerated) releases funds at the start of each stage, easing cash flow but usually at a higher rate or fee. A surveyor or monitoring valuer normally inspects and certifies each stage before release. Who it affects: people buying a plot and constructing a dwelling, including custom-build and major renovations or conversions. Expect to need a larger deposit than a standard purchase -- lenders advance a percentage of the land value and of build costs, and the loan-to-value is more conservative because an unfinished building is harder to sell if you default. Key practical points: the loan is secured against the land plus the rising value of the works; you will often hold a separate mortgage or the same facility once the home is complete; and many lenders want planning permission and detailed costings in place first. Build cost overruns are the main risk, so a contingency buffer is essential. On tax, building a new dwelling can fall under the VAT DIY Housebuilders Scheme, allowing you to reclaim VAT on eligible materials -- the standard VAT rate is 20%. Stamp Duty (or its devolved equivalents) is generally payable on the plot purchase but not on the build costs; check gov.uk for the current SDLT bands. Use a mortgage calculator to model staged borrowing and repayments.

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