Custom build houses allow buyers, with the support of a developer, to build a custom house to satisfy their wants and needs. Custom builds are often led by a developer who consults with the buyer, while self builds require a more hands on approach and are organised by the buyer directly. Both have the same mortgage options available.
Standard repayment mortgages are not available for custom or self builds. Lenders will usually allow you to borrow 75% of the cost of the land, and 60% of the cost of the build. Therefore, a larger deposit may be necessary to fund a custom new build.
Unlike a standard repayment mortgage, a loan for a custom build will not arrive in one lump sum. Instead, the loan will be divided between different stages of the development to create a cash flow to build the home.
The Two Types of Loan
- Arrears self-build mortgage
- Advance self-build mortgage
An arrears mortgage releases the funds after each stage of the build has been completed. You will therefore need to have funds available beforehand to pay for the materials and labour until they are repaid when the mortgage funds are made available. A buyer who accepts an arrears mortgage could take out a bridging loan to cover the costs initially, and then repay the bridging loan when the mortgage funds are made available.
An advance mortgage releases the funds before each stage of the build. This would guarantee that you have funds available to complete each stage of the build. However, fewer lenders are willing to offer an advance loan which may make their rates less competitive.
Disruptions To The Development
You should take into consideration that a mortgage will only cover the initial estimate of the development, and often custom builds will overrun those costs. You can seek to obtain insurance to cover delays and overspending, amongst other issues. A mortgage provider may agree to make the funds for a different stage of the development available earlier, however this will result in less money being available for the rest of the development. A bridging loan is another alternative to cover any disruptions.
As custom build projects involve more risk than a simple property purchase, mortgage lenders will usually charge a higher rate of interest on the mortgage, typically around 4%-6%. Some lenders may allow you to switch to a lower interest rate once the build is habitable.
Help To Build
The Government’s new Help to Build scheme aims to help buyers finance their projects. Through the Help to Build scheme you will be able to obtain an equity loan of 5%-20% of the total estimated cost (or up to 40% in London). The aim is to reduce the deposit payable to 5%, with the Government contributing the rest. However, a buyer wanting to make use of this scheme will still require a self-build mortgage with a lender registered with Help to Build. The buyer must also satisfy the eligibility requirements for the Help to Build Scheme.
A buyer will only receive the loan once their project is built. The Government will pay the loan to the lender, and your mortgage will switch to a standard repayment mortgage.