How do Self Build Mortgage payments work month on month?
Financing a Self Build Mortgage significantly varies from the purchase of an existing property, and this is consequently what many of our clients have questions about. Understanding how your Self Build Mortgage payments will work on a month by month basis is crucial for you to be able to effectively budget and to make sure your build runs smoothly.
To help you, this blog post will cover the intricacies of Self Build Mortgage payments. Providing you with a comprehensive overview with how you can navigate the process.
Understanding Self Build Mortgages
A Self Build Mortgage is specifically designed for individuals who’re conducting their own homes. The mortgage funds are released in stages (that are aligned to the key phases of your project) rather than in one lump sup. This staged approach is there to help manage the risk for both the lender and the borrower, and helps to make sure that funds are available as they’re needed throughout the build. You can find out more information on our Self Build Mortgage page.
How do Self Build Mortgage monthly stage payments work?
Self Build Mortgage payments are typically released at various stages of the construction process. The exact stages will depend on both your project and your lender, but will likely include stages such as:
Purchase of land, for acquiring the plot.
Preliminary costs, such as planning permissions and initial site prep.
Foundations. This is typically defined as when the groundwork and foundations are completed.
Wall plate level, meaning the stage where walls are built up to the roof level.
Wind and watertight. Installation of the roof and sealing your house from the elements.
First fix, including installation of initial plumbing, electrics, and an internal frameworks.
Second fix, which covers the completion of internal fittings like plastering and flooring.
Completion. You’ll have a final inspection and sign-off of your finished property.
Each stage will require a valuation or inspection from your lender so they can confirm completion before the next stage of funds is released.
There’s several factors that can impact the amount and structure of your monthly payments. Most notably:
Loan to Value (LTV) ratio: A lower LTV ration may secure more favourable interest rates.
Interest rates: Fluctuations in interest rates will directly influence the cost of borrowing.
Build schedule: Any delays in your construction can extend the interest only period, impacting the overall payment amounts.
Budget variations. Unexpected costs could result in additional borrowing, which will alter repayment structures.
How do lenders release your self build funds?
There’s two main ways your Self Build Mortgage payments will be released: arrears stage payments and advance stage payments. And the difference between them can have a big impact on your cash flow during the build.
With arrears stage payments, the money is released after each stage of the build is completed. So you’ll need to fund each section yourself upfront, for example through savings or having a builder invoice post works and then your lender will reimburse you once that stage is completed and signed off. This option is normally best for those who have savings, land or the where the builders want payment after works.
With advance stage payments, you receive the funds before each stage begins. This gives you the cash in hand to pay contractors and buy materials before the work starts. It can ease pressure on your budget and help keep the build moving if you don’t have a large amount of savings to dip into. This option is therefore often best for those with limited upfront capital.
If you’re not sure which option is right for you, then we can help you figure that out. Some lenders only offer one or the other, while others might give you a choice depending on your circumstances. You can book a call with us to discuss your situation.
How does monthly payment progression work?
Consider a scenario where you have a Self Build Mortgage with a total loan amount of £300,000 at an interest rate of 5% per annum. For this example, the monthly payments might evolve like:
Months 1-6 (Interest-Only Phase): Assuming £150,000 is drawn down during this period, monthly interest payments would be approximately £625 (£150,000 x 5% / 12).
Months 7-12: With an additional £100,000 drawn down, the total amount is £250,000, resulting in monthly interest payments of approximately £1,041 (£250,000 x 5% / 12).
Post-Completion (Repayment Phase): Upon completion, with the full £300,000 drawn, transitioning to a repayment mortgage over 25 years at 5% interest would result in monthly payments of approximately £1,753.
Please note that these figures are only illustrative, and actual payments will depend on specific loan terms and interest rates.
What happens between Stage Payments?
One of the most common issues we see with Self Build Mortgages is what happens between those stage payments. As lenders won’t release the next chunk of money until the previous stage is complete and inspected, if things didn’t go exactly to plan, some borrowers can be left stuck. This can then spiral, as if your builder is waiting to be paid or a supplier needs funds upfront for materials, this can delay progress. And that in turn can delay your next payment release.
So here’s how to keep things moving:
Keep a clear timeline. Knowing when each stage is due to finish (and being realistic about it) helps you plan for when you’ll need cash ready.
Talk to your lender or broker early. If you think you’re going to run into a delay, then the earlier you communicate, the more flexible options you’ll have.
Negotiate with suppliers. Some may agree to staggered payments or deposits instead of full upfront costs.
Build in breathing room. Always have a contingency fund, but also allow buffer time in your timeline so you’re not relying on everything going perfectly.
Effective cash flow management is vital during a self-build project. At Mayflower Mortgages, we always help our clients plan for this. So whether it’s helping you secure a short-term loan or talking to your lender on your behalf, we’re here to help take the stress off your shoulders.
What are interest only vs repayment models?
During the construction phase, most lenders will offer interest-only payments. This means your monthly payments will only cover the interest that’s accrued on the funds already released. An interest only approach should help manage cash flow during the build, as this will result in lower monthly outgoings.
Once the build is complete, you’ll likely have the option to remortgage to a standard residential mortgage product, which will be a repayment model. With repayment models, the monthly payments cover both the interest and principal, so they’ll gradually reducing the loan balance over time. It’s important that you plan for this transition, as it does mean your monthly payments will increase once the build is complete and the repayment phase begins. It's beneficial to switch, as this will typically allow you to secure a more favourable interest rate. But the transition will require a revaluation of the property's value and your financial circumstances.
If you work with a specialist mortgage provider (like us), transitioning your mortgage at the end of the build may be already included in their processes. If you’d like to chat about this more, you can book in a free call with us.
Do Self Build Mortgage payments impact your credit score?
Simply having a self build mortgage won’t negatively affect your credit score, as long as you keep up with your payments. But there are still a few things to think about:
You’re likely starting with interest-only payments. This means your monthly payments are lower at first, but you’ll still need to budget for the switch to full repayments later on. If the bigger payments come around and you can’t properly pay them off, then this will have a negative impact.
Missed stage deadlines can delay funds. And if you can’t pay suppliers or contractors on time, this could lead to knock-on financial issues. If we haven’t said it enough, make sure you have a contingency plan to think about this scenario in advance.
Your debt-to-income ratio could look higher. Especially if you’ve taken on additional loans to cover early-stage funding, this could affect your creditworthiness in the short term.
Our advice? Be upfront and realistic about your financial picture from the start. Work with a broker who understands the nuances of self build projects and can help you avoid red flags lenders might pick up on. If you choose to work with us, Mayflower Mortgages, then we’ll assist you throughout the project and make sure you’re not going into this blind.
Are you clear on how Self Build Mortgage monthly payments work?
Understanding the month-by-month workings of Self Build Mortgage payments is an important part of successfully managing your project finances.
By getting familiar with how it works ahead of the project starting, you can better prepare for the financial commitments involved with building your dream home.
If you’re looking to find out more information about Self Build Mortgages, you can check out our dedicated Self Build Mortgage page to see how we can help. Or if you have questions specific to your circumstance, you can book in a no-strings-attached call with us instead.