How to fund a self-build house

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

It’s definitely 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.

We’ve looked into the pros and cons of buying vs building houses on this blog before, but today, we’re going to run through the options available for funding your own self-build.

Use cash savings

The simplest way to finance a custom building project is to pay upfront using your own cash pot. Of course, it’s not quite that easy, as not everyone can save up hundreds of thousands of pounds, or come into 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.

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 funds to be protected against loss from financial service failures.

Sell your current house

If you’re already a homeowner but ready to fulfil your dream of having a custom self-built home, you could sell your existing house to raise the funds for the build. 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 others may 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 current house 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 remortgaging 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 lenders provide self-build mortgages that allow you to borrow against the 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 known as stage payments at key points throughout construction. 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.

Apply for the Help to Build Scheme

While the Help to Buy scheme for first-time buyers of new builds closed on October 2022, the UK government launched the Help to Build scheme in June 2022 to support those who want to get on the property ladder by building their own homes.

This is an equity loan that will help to bridge the gap between the deposit and the cost of the land and building materials, allowing successful applicants across England to borrow 5–20% of these costs (40% in London). The government-backed loan is available for:

• Applicants over 18 years old with the right to live in England, who intend to live in the self-built home and are able to apply for a self-build mortgage
• Buying land to build on, building a new home, converting a commercial property to residential, customising a shell build, or demolishing a property to build a new one
• Total build costs less than £600,000 inclusive of VAT and contingency funds (£400,000 if the applicant already owns the land)

It’s important to note that this equity loan is not available for applicants who:

• Already took out a Help to Build loan in the last two years
• Currently owe money through a different government-backed home ownership scheme
• Have financial interests in other residential properties or land in the UK or abroad (which also applies to anyone else who will live in the self-build home)
• Want to upgrade an existing home, build multiple self-built homes, or build a second home

The scheme is currently open for four years, and successful applicants will have three years to find and buy the land and build their new homes. If you’re considering this option, be sure to read the government’s Customer Guide to understand the terms of the loan and repayment.

Don’t forget a Self-Build Warranty

Out of these options, the most suitable route for financing a self-build house 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 and applying for the Help to Build scheme 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.