When you own a plot of land or have a garden that’s big enough to build a property in, the next step is to find funds to start your self-build project. Unless you have significant savings, you’ll more than likely need to apply for a mortgage. But can you get a self-build mortgage when you already own the land?
Can you get a mortgage for land you already own?
A self-build mortgage is designed to provide you with funds to buy a plot of land and build your home. As you already own the land, you may be worried that you can’t apply for a mortgage. However, by owning the land to build a house on, you won’t need to borrow as much, which puts you at an advantage. More self-build mortgage options will be available to you and you’ll be able to benefit from a better deal.
How does a self-build mortgage work?
A mortgage to build a house is different to a standard residential mortgage used to buy an existing property. With a standard residential mortgage, you receive the funds in advance to make the purchase. The funds for a self-build mortgage, however, are released in stages by the lender throughout your project. These stages are either in arrears or in advance.
Advance and arrears funding options
Advance payments mean that you receive the funds at the beginning of each stage so that you don’t need to cover the costs yourself. When receiving the payments in arrears, you have to pay for everything – including the labour costs and materials – until that particular stage has been completed. At that point, the funds will be released to you, allowing you to recoup your costs. Arrears funding is more common for a self-build mortgage and usually comes with better rates than advance funding.
With an arrears arrangement, you have to ensure that you have adequate finances in place to cover all of the building costs until the mortgage funds are released to you upon completion of the stage. However, an arrears self-build mortgage is easier to handle when you already own a plot of land. This is because you’ve removed the headache of having to find the funds to buy the land as the first stage. To cover the costs of the next stage, remortgaging the land may be an option.
How much can you borrow?
The amount you can borrow is determined by different factors. The lender will need to know the anticipated build cost, how much deposit you can pay and the value of your plot of land. They will check your affordability, credit rating and any outstanding debts.
Lenders typically offer self-build mortgages with a loan-to-value (LTV) ratio of 60% to 70%. This means that you’d need to have a deposit that covers between 30% and 40% of the value of the completed building project. Some lenders offer a higher LTV, however, when you already own the land, such as 75% to 80%. As you’re borrowing less, you reduce their level of risk and better options become available to you. Private banks and specialist lenders offer more flexibility, with some providing 100% self-build mortgages when additional security can be provided. In this case, your plot of land would be considered for the security.
Using the land as your self-build mortgage deposit
Lenders generally expect you to have adequate savings to cover your self-build mortgage deposit. When you own the land, however, you’re in a better position. Some lenders offer a higher LTV when you already have a plot of land so that you can pay a smaller deposit. With some lenders, however, you can actually use the land as your deposit. If you have planning permission for your land, it will have a higher value. This will go in your favour with the lender who may allow you to borrow more for a self-build mortgage.
Eligibility criteria for a self-build mortgage
The criteria for a self-build mortgage is more complex than that for a standard residential mortgage. As well as passing the lender’s affordability checks, you have to provide detailed information relating to the self-build project. For example, drawings and specifications, cost projections, a risk assessment, schedules, a contingency plan, building regulations approval, planning permission details, site insurance, a structural warranty and professional indemnity cover for the architect.
Planning permission for your self-build project
To be able to build on the land, you need planning permission. Outline consent is the initial stage of planning permission, giving you permission to build without agreeing to specific details. Detailed consent is full planning permission, enabling you to proceed with your project.
When applying for a self-build mortgage, some lenders accept outline permission and will release some of the initial funds on this basis. Usually, however, detailed consent must be obtained before any funds will be released. As mentioned earlier, it’s in your interest to secure planning permission for the land before applying for a self-build mortgage. Having planning permission will increase the land’s value and you may be able to borrow more as a result.
Is a self-build mortgage right for you?
If you’re undecided as to whether a self-build mortgage is the right choice of funding for you, just give us a call on 01322 907 000. Our self-build mortgage brokers will discuss your project plans and this type of mortgage in detail with you. They’ll also advise you on the alternatives available to help you make the best financial decision for your needs. For example, you may prefer to remortgage the land or another property or use bridging finance as a short-term loan. They will also guide you on the financial help that’s available for self-build projects, such as Help to Build.
We work closely with self-build mortgage specialist lenders and private banks, enabling us to match you with the one most suited to your needs. Our mortgage brokers will tailor-make your application, ensuring that you have the right documentation to meet the lender’s criteria. This will help to ensure that your application is successful and that you benefit from the best rate and most flexibility available for a self-build mortgage when you already own the land.