Self Build

Self-build mortgages are acquired by borrowers who wish to build their own property from scratch. Investing in a self-build has many selling points. First and foremost, the opportunity to design and implement a vision of your perfect home is a dream for many in society. Rather than being forced to choose from a scarce number of imperfect properties in a given location, a self-build provides an alternative. Secondly, if the self-build’s market value exceeds its reinstatement value when the property becomes habitable, self-builds can generate short-term equity for the borrower. In other words, if the property is worth more than the value of its parts, the borrower could generate a sizeable profit from immediately selling it. After all, the entire housing construction trade thrives on the short-term capital appreciation of self-builds.

Release of funds for self-builds

There is one key difference between the mortgage processes of a self-build and standard mortgage. It relates to the release of funds. With a standard mortgage for an existing property purchase, the mortgage funds are secured to the property immediately. Repayments are then required on the entire mortgage sum from the date of exchange of contracts, whereas the funding for self-build mortgages is released in stages. The reason for this is to protect the lender from unnecessary risk. The lender releases funds at various stages and only releases subsequent lump sums when certain construction milestones have been reached. A surveyor, instructed by the lender, usually visits the development site to ensure that each milestone has been met before further funding is provided.

With self-build mortgages, borrowers only make mortgage payments on the funding that they have received. Many lenders insist that mortgage payments are made on an interest-only basis until the property has been fully developed. This is to protect the lender’s investment by reducing the borrower’s risk of poor liquidity. When the property is built, capital and interest repayments are accepted.

Stamp Duty for self-builds

Stamp Duty Land Tax (SDLT) is applied to the purchase of properties. The rate of SDLT charged depends on the price of the property and whether it is a second home/buy-to-let. Second homes and buy-to-lets are liable to a greater rate of SDLT than a main residential purchase. However, for self-builds, stamp duty is only payable on land purchases in excess of £125,000. No further stamp duty is charged when the property is built.

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This article is intended to provide a general understanding of the topic. The contents should not be treated as advice. For personalised advice, please submit an enquiry. Your home may be repossessed if you do not maintain repayments on your mortgage.

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