How Does a Self Build Mortgage Work in the UK

Níall Hedderman · ARB-registered architect · RIBA Chartered Member

I've run my own architecture practice in Edinburgh since 2009, specialising in altering, extending and renovating homes. Since 2022 I've given over 340 online consultations to homeowners and buyers across the UK.

https://www.youtube.com/watch?v=mqwU6m0z_Dw

Have you ever dreamed about buying a site and building your own home?

Do you fantasize about being on grand designs?

My name is Níall and Ive been working as an Architect in the UK since 2004, and Ive been self-employed since 2009. I specialise in altering and extending private homes. And before I became my own boss, I worked for larger Architecture firms that built housing estates for property developers. In my 24 year career, I can count on one hand the number of times I've been involved with a one-off, self build home.

You would think the UK, with its fixation on home ownership, plenty of countryside, a sophisticated financial system, and lots of wealthy people, would produce many one-off, self-build homes. But according to a number of studies I’ve read, there were only about 13,000 new self-build homes in the UK last year. Given the UK builds only about 190,000 new homes per year, that’s less than 7% of the total. Another way to look at it, is that of all the 67 million people in the UK only 0.0001% of the population built their own home last year.

That means over the course of your forty-year working life, the odds of building your own home are 250 to 1 in the UK.

That’s tiny. What that means is that almost no one in the UK builds their own home. Even when I surveyed my channel members, only 7% were in the process of building their homes or had already done so. And this channel focuses on domestic construction projects. Why is this? Why do so few people in the UK self-build their own homes?

I have written posts that look into the difficulties of getting planning approval and the pitfalls of buying sites, but one area I haven’t explored is the financial sector. I must admit I didn't know a whole lot about mortgages, so I spoke to Patrick Cannon, a mortgage broker I've known for years. Pat arranged the mortgage for my home and has also helped some of my past clients fund house extensions and internal alterations. I should say that I am not a financial advisor and if you want more information this is a link to Pat's firm. Get in touch with him, he isn't paying me to say this, but he is a genuinely nice guy and he knows his stuff.

So, It turns out that getting funding from a mortgage lender to buy a site and build a home is more challenging than you might think. It's so much easier to just buy a house that’s already been built. But let's assume you are determined. It's been your life ambition to build your own dream home. How do you get a mortgage to self-build in the UK?

Let’s start at the beginning. Let's suppose you find a site for sale with planning permission for a one-off house.

I didn't know this until Pat told me, but it turns out you can borrow money to buy that site. According to Pat, as of October 2022, a couple of lenders will lend up to 90% the value of the land. But there is a catch. No lender will give you a mortgage just for the land on its own. They will only lend if there is a fully worked out design and detailed cost plan for the entire project. What that means in practice is that you have to find a site, and hope the owner doesn’t sell it to someone else, while you design your dream home with an Architect.

Pat was at pains to drive home the point that planning application drawings won't be sufficient. You will need fully detailed construction drawings. You will also need a structural engineer to specify foundations, walls, roof, and any steel required. And once all that is done, you need to take those drawings and specifications to a quantity surveyor who will prepare a bill of quantities. That document will go into detail on how much material and labour is required to construct your home and what it's all going to cost. And it's presented in a way that the bank can understand.

This process could be seen as a chicken-and-egg scenario. Let me explain.

Every project I have designed started out with a wish list. The things the client wanted to have in their new building. I always ask my clients up front how much they wish to spend on their project, so I can design it to the budget, as far as possible. My clients are usually richer than average and some are very wealthy but nobody has infinite money. While my own knowledge of construction costs is reasonably good, it isn't until a contractor agrees to a price that we can be certain how much a project will cost to build. In my projects, this costing exercise happens as early as possible and it often leads to parts of the design being removed or reduced, so that the project is affordable.

Pat advised that mortgage lenders place limits on some materials and design features, such as zinc cladding and flat roofs. They don't ban these outright but they won't lend if a home design has more than a certain amount and that figure may change over time. If you are designing a house and then having it costed by a QS, it may be that the initial design is beyond your budget, so you have to go round again and reduce the design. The design may need to be revised several times before it is affordable.

This process could take months to complete. In the meantime, the site could be sold to someone else.

It should be obvious at this stage that, while you might be able to secure lending to purchase the site, it may just be easier to buy it for cash. Even if the owner of the site is willing to wait months for you to work out the design and the costs, you still have to pay fees to an Architect, Structural Engineer and Quantity Surveyor. Those fees could easily get into five figures.

That realisation helped me understand the first major hurdle to self-building a house in the UK. You need lots of money upfront.

And it gets worse. If you buy a regular house, one that’s already been built, a typical mortgage lender will transfer all the money in one go. That doesn’t happen with a self-build house. Oh no. The mortgage company will release the funds in arrears at four distinct stages, during the build.

Once the foundations have been built, you get some money.

When the roof is on, you get some more money.

You get a bit more once the building is wind and water-tight.

And once it is finally complete you get the final 25% of your mortgage.

This means you need to pay for all the construction work with your own money first and then you get reimbursed afterward by the mortgage provider.

This is yet another financial hurdle. It takes sooooo much money up front to self-build a house. But let's assume you have sufficient funds. Let's say you can purchase a site for cash and fund the material and labour costs before drawing down money from the mortgage lender. There is another thing you need to be aware of. The mortgage lender will insist that a suitably qualified person inspect the site during construction, to certify that the house is being built in accordance with the approved drawings and to a reasonable standard.

This is a Council of Mortgage Lenders form. I would use this to certify your self-build home when it's under construction. It can be signed by either a Chartered Surveyor or an Architect.

CML forms, they are not an insurance backed warranty

The CML form is widely misunderstood, some people believe this is a kind of warranty. They think they can call up the Architect years afterward to get any defective work fixed. If the toilet doesn’t flush or the lights flicker, for example.

The CML prints a warning on the back of the form.

This form should not be regarded as a substitute for defects liability insurance such as that provided by NHBC, Premier Guarantee, Zurich Insurance or similar.

Even though you are paying for the architect or surveyor to inspect the building and sign this form, we aren’t responsible to you. Our primary responsibility is to your mortgage lender. This is the same as when you buy a house, subject to a survey. You pay for a surveyor to check the house before the mortgage lender agrees to pay for it. You may be paying the surveyors fee, but they are reporting to your bank. The only scenario the Mortgage lender cares about is having to repossess the property and then sell it on to clear the mortgage debt.

This system can pose problems for people who are sufficiently wealthy that they don't need a mortgage to buy the land and build a house. You see if they try to sell the house or even mortgage it themselves at any time within 10 years of its construction, the lender will ask for a CML form or similar insurance-backed guarantee.

Pat has been through this with a client who built his own house for cash but then tried to mortgage it, to raise some money. The house was less than 10 years old and no lender would consider it until they got an insurance-backed warranty in place. Apparently, this would have cost two or three thousand pounds if it had been organised during the build process but afterward the warranty cost about ten thousand pounds. Because of the added risk to the insurer, since they hadn’t seen the building during construction.

I have signed CML forms in the past but I now refuse to get involved with them. They are too much hassled and I am liable to the mortgage lender for years afterwards. So every time the property is sold or re-mortgaged I get contacted to confirm that I am still liable.

I've also been threatened with legal action for refusing to sign a CML form. But that’s a story for another day.

During our chat, Pat and I also discussed mortgages for house extensions and internal alteration projects. You can check out that post here.