Buying your first home is exciting but what if you want to build your first home rather than buying an existing one? How do you go about funding it? You’ll more than likely need a self-build mortgage but is this possible when you’re a first-time buyer?
Can a first-time buyer get a self-build mortgage?
Yes, as a first-time buyer needing a mortgage for building a house rather than buying an existing one, you can apply for a self-build mortgage. This type of mortgage is more complex than a standard residential mortgage. As such, it poses more of a risk for lenders. This means that fewer options may be available to you than if you decided to buy a new build or an older existing property. But, as long as you meet the eligibility criteria, you can secure a first-time buyer self-build mortgage and look forward to building your dream home.
What eligibility criteria do you need to fulfil?
As with any mortgage, you need to meet the lender’s criteria and this is more extensive for a self-build mortgage. Each lender has its own criteria but they generally all check your income, credit history, age, deposit and project details.
The lender needs to check your affordability for a first-time home builder loan. A multiplier is used to determine how much you can realistically afford to borrow. This is usually 4 or 4.5 times your salary.
Having a good credit history will increase the chances of your first-time buyer self-build mortgage application being approved. Don’t worry if you have a bad credit rating, though. There are ways to improve your credit rating before applying for a mortgage. There are also specialist lenders who approve loans for first-time home buyers with an adverse credit rating.
You need to be 18 to apply for a standard residential mortgage and this age is accepted by many lenders as the minimum age for a self-build mortgage. However, some lenders have a higher minimum age requirement of 25 for this type of mortgage.
When buying your first property using a standard residential mortgage, you can benefit from low-deposit deals and incentive schemes. A self-build mortgage, however, has a higher deposit requirement. Lenders generally offer a loan-to-value (LTV) ratio of 75%, which means that you need a deposit equalling 25% of the building project’s value. Some lenders may insist on a much higher amount, especially as you’re a first-time buyer, such as 40%.
One option if you’re struggling to save a self-build mortgage deposit is to apply for a Help to Build equity loan. This allows for a 5% deposit alongside a 95% self-build mortgage.
As well as the above factors, a lender will need information about your self-build project. This will include cost projections, building schedules, a risk assessment and a contingency plan. You will also need to provide:
- Proof of the planning permission
- Drawings and specifications for the construction works
- The building regulations approval
- A structural warranty and the site insurance
- Details of the architect’s professional indemnity cover
- Details of the construction team
This last aspect, having a construction team, is recommended as a first-time home buyer. Having a professional team on board to help with your self-build project will reduce the level of risk for the lender. This will add weight to your application, significantly improving your chances of success.
Considerations before applying for a self-build mortgage
Before proceeding with your mortgage application, make sure that you’ve taken all of the potential costs and fees into account. The fees and interest rate payable for a self-build mortgage are usually higher than those payable for a standard residential mortgage. This is because of the increased risk to the lender. Also, no matter how much careful planning is done, self-build projects often go over budget. If this happens to you, you’ll need to borrow additional funds and will likely be charged a higher interest rate.
During the construction of your home, you need to be covered by self-build insurance. This protects you, the contractors, the site and the actual building throughout the project. Another consideration is that you may finish building your home earlier than expected. If so, you’ll probably want to benefit from a better deal with a lower interest rate. Some lenders charge you a penalty fee for doing this. Other lenders, however, let you switch to a lower rate once your property becomes habitable without penalising you.
Build your dream home with a first-time buyer self-build mortgage
The thought of owning your first home is exciting, especially when embarking on a project to build it to your specifications. Having said that, self-build mortgages are complex and you don’t want the excitement to be marred by the financial aspect. That’s where our mortgage brokers come in.
Located throughout Kent, London and Edinburgh, they are highly experienced when it comes to self-build mortgages. They will ensure that all of the necessary paperwork has been collated and that your application has been completed accurately. This will avoid any unexpected delays and having a strong application will improve your chances of success.
With access to the entire market, they will search for the best deal for you, not just in terms of the interest rate but in the flexibility it offers. For example, having an interest-only option while the construction is in progress and switching to a repayment mortgage once the property becomes habitable. To discuss your project plans and financial needs with one of our self-build mortgage specialists, just give us a call on 01322 907 000. They will provide you with expert, impartial advice before tailor-making your first-time buyer self-build mortgage application when you’re ready to proceed.