Owning a home is a dream everyone aspires to make come true. However, with the world’s economy, it’s becoming extremely difficult to achieve it with cash on hand. That’s where mortgages come in.
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A mortgage is the common man’s answer to becoming a homeowner. There are different forms and ways of acquiring a mortgage.
If you prefer building a house of your own rather than buying one, the best mortgage for you is a self-build mortgage.
With that said, let’s take a comprehensive look at what a self-build mortgage is and how it compares to a regular mortgage!
Understanding Mortgage Basics
A mortgage in its most basic term is a type of loan given to buy a home. It’s an agreement between you and a lender, the lender gives you cash upfront to purchase a home and you pay back over time with interest.
There are four major parts to a mortgage;
Collateral
After agreeing with the lender, the new home becomes the collateral. The bank can take the house if the mortgage can’t be paid back. This is called foreclosure.
Taxes And Insurance
When a home is bought, the local community collects a tax based on a percentage of the home’s value. The tax goes into the development of the community.
Lenders like LoanDepot often require you to get home insurance to protect your home in case of any disaster or accident.
Principal
The amount of money borrowed is called the principal. You can lower the principal by adding more of your funds to the purchase price of the home, this is called a down payment.
Interest
For the lender to make money, the borrower is charged for borrowing money from them. The money charged is the interest. It is typically calculated as percentages, this is called an interest rate.
The principal and interest make up the monthly mortgage repayments, which will reduce your debt over a certain time.
It’s worth noting that interest rates vary depending largely on the length of the repayment period. For instance, a 30-year repayment period will typically attract a higher interest rate than a 15-year repayment period.
What Is A Self-Build Mortgage?
As the name implies, a self-build mortgage is a loan taken to fund a property you are building. This type of land mortgage usually covers the purchase of the plot and the cost of building your property.
For lenders to ensure you remain on budget and the money is spent wisely, the overall amount of money you secure with a self-build mortgage is released in stages.
How Funds Are Released
As mentioned earlier, the loans given in a self-build mortgage are released in partial payment.
Normally the funds are released with a typical self-build schedule for construction, however, it may vary between lenders and some might have a different installment plan. It also varies with what type of project you want to embark on.
The most common way lenders release funds is in five stages. The first stage is the purchase of land. The second stage is the laying of the foundation.
The third stage is for the building of the walls to the roof level or the construction of most of the shells of the building. The fourth stage is for getting the building watertight, roofed, or plastered. And the fifth stage is for the finishing of the property.
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Types Of Self-Build Mortgage
There are two types of self-build mortgages. They are:
Arrears Mortgage
The arrears mortgage is for people who have enough cash on hand to pay for their projects. This offers payments after each stage of construction is completed.
A professional valuer comes to inspect and approves your next payment. This means you front up the money for each stage and then get paid back. This is the most common one offered.
Advance Mortgage
This is the opposite of the arrears mortgage. You’re given the money before the construction stage begins. This is perfect for those who are reliant on the mortgage to fund each stage.
This kind of mortgage poses more advantages with cash flow, however, there aren’t many lenders who provide this kind of mortgage. The rates may also not be as competitive as the arrears mortgage.
How To Apply For a Self-Build Mortgage
Just like regular mortgages, self-build mortgages are assessed by risk. It is however a higher risk for banks or lenders to give you the money. There isn’t a physical house like in regular mortgages, that can be repossessed if repayments can’t be made. That’s why the money is given in parts, to show progress on the self-build process.
When you apply for a self-build mortgage, you’ll have to show your lender a couple of documents, some of which are;
A copy of your construction plan, your planning permission, the architect’s professional indemnity cover, and the total cost showing any fixed-price contract prices, the approval for the building’s regulations, insurance, and the structural warranty.
Lenders will also make the standard checks like your credit history and any other affordability checks.
Self-Build Versus Regular Mortgage
Now that you understand what a self-build mortgage is, it’s time to know what form of land mortgage loan works for you.
Self-build mortgages are taken to build a home, and it presents lenders with a higher risk than regular mortgages. That’s why the funds are given to you instrumentally.
At the end of construction, the loan becomes due and it is converted to a normal mortgage. The process is more complicated than a regular mortgage, but you get the benefit of designing your home to your exact taste.
A regular mortgage on the other hand is a loan taken to buy an already-built house. Because of its straightforwardness, lenders release the funds all at once.
The houses are already built, so you can move in after it’s been bought. There is typically less paperwork and depending on your circumstances, you might be able to get a regular mortgage with a little deposit.
It also takes a lot of time to get a self-build mortgage.
You’ll have to search for the perfect plot of land. The land has to be valued and approved by the lenders. Gathering all the necessary paperwork required by the lender, and also the community, like planning permissions and so on.
All this happens before you’ve been approved for the mortgage. After you’ve been approved, you also have to consider construction time and possible setbacks in the building project.
A regular mortgage doesn’t require as much time and paperwork. All the lender needs are the feasible assurance that you will be able to make your repayments and that you might be approved for a regular mortgage.
After you’ve been approved, all you have to do is find the perfect house, pay and prepare to move in.
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