How to finance building your own home

The most obvious way to finance a new build project (or any project) is to have a big pot of cash. For many, this will be pretty inaccessible, but it could be an option for those who have the savings or who might have come into some inheritance funds.

If you are using cash, remember these important tips…

• Self-build projects typically take over two years to complete, so make sure your savings are earning as much interest as possible during this period.

• To be fully protected by the Financial Services Compensation Scheme, you can’t have more than £85,000 (per person) with any one banking institution.

• Make sure you can always access your funds, this means putting your money in access savings accounts (which typically offer less interest but more flexibility).

If your home has increased in value over the years, selling it could be a smart option to get the funds you need.

First, you’ll need to have your home evaluated to understand how much equity you have to play with. For those living in the South East, specifically in the London area, in just ten years the value of your property may have doubled. However, not all areas of the UK are so blessed and homes in the North West, for instance, have seen prices stagnant in recent years.

You’ll also need to consider…

• How much do you need to cover the selling costs?
• Where will you live while the project is underway? What costs will temporary accommodation rack up?
• How much of your mortgage have you paid off? How much actual money will you receive from the sale?
• Will selling your home cover all the costs or will you need to supplement your funds some other way?

There are mortgages specifically designed to cover self-build projects, however, remortgaging might be the more cost-effective solution.

Providing you have no ERCs (early repayment charges) and have significant equity in your home, remortgaging your existing property is likely to provide more favourable interest rates than a self-build mortgage (more on this below).

However, as with all finance options, there are things you need to consider…

• Do you plan on selling your home once the build is completed or renting? If you plan on selling, you’ll need a remortgaging deal which only lasts roughly 2 years.

• Lenders don’t love providing remortgages for self-builds, as they’re seen as risky. Therefore, you may have to shop around to find a good deal and it could be worth getting a property finance specialist onboard.

• If you can’t raise enough money through your existing equity, you might consider using the money from your remortgage as a deposit for a bigger loan.

As the name suggests, these mortgages have been created to specifically suit a self-build project. However, this doesn’t mean they’re always the best option and they have some pretty big drawbacks.

Like traditional mortgages, you’re borrowing against the value of your home, only in this case, your home doesn't exist yet. Because the value of your project goes up the further along you are, self-build mortgages release money in stages and only once key milestones have been met. These milestones will be pre-agreed before your project takes place.

How much you can borrow will depend on two things: your deposit and how much the bank believes you can afford to borrow.

On the surface, this works like a normal mortgage, however, because lenders view it as an added risk to lend against a self-build, rather than a completed home, the deposit you’ll need is much higher - typically 25% of the project’s value.

On the whole, it’ll be cheaper to borrow against your current home or to sell it, rather than take out a self-build mortgage. However, if you do go down this route, we recommend converting this to a traditional mortgage once the project is complete.