Self-build mortgages:The money behind the mortar

Each year, about 20,000 people build their own homes, according to Government statistics, and the number is rising. The idea of having total control of the design of a new home explains the popularity of self-build. There is also a good chance, if the home is well designed, of making a significant profit when it comes to sell.

Financing a self-build project, though, remains a challenge. The self-builder's website www.selfbuildit.co.uk estimates that the average self-build project costs £140,000, and that two-thirds of self-builders need a mortgage.

The number of financing options is far more limited than for a conventional home purchase. Unless a self-builder has a substantial amount of cash to hand, or can borrow from friends and family, he will need a mortgage that is tailored to the construction process. This means finding a mortgage lender prepared to release funds in stages, including for land purchase.

But despite the growing interest in self-build, it is an area of mortgage lending that some lenders are finding hard to service. Last year, the Britannia Building Society stopped selling self-build loans.

"Self-build is a niche market," says Mike Sims, the society's mortgage marketing manager. "Self-build mortgages are complex, both to sell and to process. We found that, despite training our staff to a high standard, it was difficult to maintain that knowledge because staff dealt with self-build cases on an infrequent basis. Also, the onset of mortgage regulation has made the sale of self-build mortgages more complicated. This may explain the more recent decisions of a number of other lenders to withdraw from this lending sector."

There are, though, still several mortgage lenders who remain committed to the market. Local building societies are often receptive to loans that need stage payments. Examples include the Swansea, Scottish and Newcastle building societies. Nationally, Norwich and Peterborough building society has a strong reputation for self-build loans, according to Ray Boulger, senior technical manager at the mortgage brokers Charcol. The specialist self-build service Buildstore also offers mortgages. The company can introduce self-builders to lenders such as HBOS, Skipton Building Society and Lloyds TSB Scotland.

The Buildstore Accelerator mortgage offers owners loans of up to 95 per cent of the land price, as well as the same percentage for construction costs.

There is, however, a premium attached to self-build mortgages. A self-builder should expect to pay between 0.75 and one per cent more than for a standard mortgage. This is, however, significantly lower than the 2 per cent-over-base rate banks generally charge to property developers.

The premium charged for a self-build mortgage reflects the lenders' extra administration as well as the risk: there are no guarantees about the value of the property until it is finished. But the extra costs make it important for a self-builder to pick a mortgage that offers flexibility.

Ideally, according to Boulger, self-builders should look for a mortgage deal that lets them switch to any of the lender's standard mortgage products once they have finished construction.

But self-builders may well want to go back to the market and search for a new mortgage deal once they have finished their new home. One reason is that the property may be worth significantly more than the land and build costs alone. Some property market estimates suggest that the uplift in value can be between one-third and half of the original cost, although some self-builders, especially those tackling unique or architecturally interesting projects, achieve significantly more.

Potentially, this allows the builder to look for a larger mortgage, as well as to choose a loan from a mortgage company that does not handle staged mortgages.

If the new home is worth significantly more than the cost, the borrower may well need a much smaller loan to value (LTV). This could save on interest charges.

"We generally advise self builders to go for a loan with no early repayment charges so that they can move to a more competitive rate when the property is finished," says Boulger.