The different types of self-build funding for your dream construction project

Many people dream of building their own custom house that meets their every need and personal taste perfectly, but believe it could never happen without being a millionaire.

However, there are several ways to finance a self-build project that don’t require winning the lottery (though it wouldn’t hurt, of course!).

It’s a substantial task to design and fund a self-built house, but it’s sure to be worth it, as it will be tailored to your family rather than a cookie-cutter new build.

At ABC+ Warranty, we’ve looked into the pros and cons of buying vs building houses, and now we’re going to run through your self-build funding options.

Use cash savings

The simplest way custom builders can finance their construction project is to pay upfront using their own cash pot. Of course, it’s not quite that easy, as not everyone can save up hundreds of thousands of pounds or receive that kind of money from relatives.

While the cost of self-building varies depending on location and specifications, the average cost of a self-build house in the UK is £1,775–£3,000 per square metre. At the lower end of the scale, you would need at least £168,625 for a 2-bedroom house, and around £450,000 for a 4-bedroom.

You can’t rely on averages to set your budget, though, as you should plan out the design in advance and calculate all the associated costs for labour, materials, contingencies, etc.

Prices can fluctuate, and unforeseen expenses can pop up, so you should always add at least 15% on top of your budget.

Also, the location you choose to build can determine the price of your project. Take this into account when budgeting for your dream home.

If you do have the cash, you should keep the funds in a secure and accessible savings account, where it can earn interest over time. Be sure to comply with the Financial Services Compensation Scheme (FSCS) if you want your self-build funding to be protected against loss from financial service failures.

Sell your current house

If you already own your own home but you’re ready to fulfil your dream of running a custom build project, you could sell your existing home to raise the funds for the self-build home. Depending on the location and how long you’ve owned it for, the property may have increased in value, so selling it could provide enough money to finance the self-build house completely.

However, if you haven’t finished paying off your mortgage or you live in an area with stagnant property values, you may have to look into other options to supplement whatever you make from the sale. You also have to consider new living costs when you no longer have a primary home.

Some people stay with relatives, others may switch to renting and put their belongings in storage, or may even set up a temporary home onsite (such as a caravan) for the duration of the build. As the project could take up to two years to complete, this may not be an enjoyable experience.

If you have significant equity, another option is to re-mortgage your existing property and put those funds towards the self-build. This would typically come with lower interest rates than a self-build mortgage, but if you plan on selling the house once your self-build is ready, you’ll need to find a provider willing to offer a short-term re-mortgaging deal with no early repayment charges.

Get a self-build mortgage

One of the most common finance routes for self-builders is to apply for a specialist mortgage. Some self-build mortgage providers allow you to borrow money against the market value of your property, like a standard mortgage – but since your home hasn’t been built yet, the process is very different.

To ensure that your project is completed on schedule and within budget, self-build mortgage lenders typically release the funds in instalments at key points as the build progresses. These are known as stage payments.

There are usually two types of self-build mortgages available:

• Arrears stage payment mortgage – Based on the property value at each stage, releasing a percentage of this value after each stage is completed (meaning you must cover the upfront costs of each stage yourself first).
• Advance stage payment mortgage – Based on the land and build costs, releasing enough to cover each stage in advance of work commencing on the particular stage (fewer lenders offer this, and rates are less competitive).

Typically, you can borrow up to 85% of the land and build costs for an arrears self-build mortgage, and up to 95% for an advance self-build mortgage. Both will have a higher deposit than a traditional mortgage due to the increased risk, which can be up to 25%. 

However, as you only pay interest on the percentage you’ve borrowed so far and not the total mortgage, payments should be affordable. You can also switch to a conventional mortgage model with a lower interest rate after the self-build has been completed.

Don’t forget a Self-Build Warranty

Out of these options, the most suitable route for self-build finance will depend on your circumstances and the scale of the house you have in mind, but it may be better to consider a combination of all or a few of them.

For example, using a smaller amount of cash savings for a deposit in conjunction with a self-build mortgage could make it easier and more accessible than you originally thought to achieve your dream home.

Something you should also bear in mind is setting up a self-build warranty to protect your investment in your new house. This policy can help with the costs of repairs if latent structural defects develop as a result of faulty workmanship or materials.

Read our blog to find out more about why you need a self-build structural warranty, or get in touch with our team at Architects Certificate, where we provide a range of structural warranties. Call 0161 928 8804, email info@architectscertificate.co.uk, or request a quote directly, and we’ll be in touch.