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A self build mortgage is a specialist type of mortgage designed for people who want to build their own home or perhaps take on a major renovation. There are lots of reasons people choose to build their own homes. It's a cost effective way of buying a home because the final market value may be much greater than the price of the build, including the land. There is also greater scope for putting your own stamp on your home and it can minimise taxes such as stamp duty as this is paid on the land and not on the building.
There are many variations of these mortgages and one of important things to consider is when the lender will agree to release the loan amount to you. This can make a huge difference to both how smoothly the build runs and your stress levels! Some lenders will make the loan available to you in order to buy the land and others will want to wait until building works have begun. Lots of people whose lenders fall into the latter category fund their build, initially at least, by selling their current property and moving into rented accommodation.
There are two ways in which lenders will release funds to you. An arrears stage payment means that the lender releases the funds as the various stages of the building project are completed. This can be a bit of a problem if your lender delays the release of your money, as you'll have to find the money to keep your project going.
An advance stage payment mortgage means that the lender will release the funds for each stage of the build as they are due to begin, virtually eliminating the cash flow problems caused by arrears stage payments. Cash flow is one of the major headaches of any building project as the costs for building and project management often rise during building, perhaps due to unforeseen structural problems in the case of major renovation works, for example. Remember to allow for a contingency of around 10% of the projected cost of your build.
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