Self Build Mortgages vs Residential Mortgages (Pros and cons)

When it comes to weighing up the pros and cons of a self-build mortgage or a residential mortgage, price is often the deciding factor, after all, everybody wants a good deal.


But are there other factors to consider, like the time it could take to build a property versus the ease of moving into a finished property? And have you ever wondered which mortgage is easiest to get approved for?


This good to know guide answers the questions queried by borrowers deciding whether to apply for a self-build or residential mortgage, including:


  • Self-build mortgage v residential mortgage - what are they for?

  • What are the pros and cons of each?

  • How do I know which mortgage is right for me?

  • Do I have a better chance of approval for a residential mortgage or a self-build mortgage?

  • Which mortgage has the higher interest rate?

  • What’s cheaper, a self-build or residential mortgage?

  • Is it better to buy or build a house?

Self-build mortgage v residential mortgage - what are they for?

If you plan on building a property but lack the cash to fund the project, you’ll probably need a mortgage. A standard residential mortgage wouldn’t be suitable for a self-build project, as these types of loans are used to purchase already built structures.


A key difference between a self-build and a residential mortgage is that the money for a self-build is released in gradual stages, as the build progresses.


If you were approved for a residential mortgage, the money would be released as one lump sum.

What are the pros and cons of each?

Advantages of a self-build mortgage:


  • A big draw for many building a custom made property is the opportunity to save money. Sourcing materials and doing a lot of the work yourself where possible can help to cut costs

  • Many people find that once their property is built, the value is significantly more than the cost of the build

  • Stamp duty does not apply to the cost of the building work or the value of the property once the work has been completed. In fact, stamp duty is only charged on the plot of land itself if it exceeds £125,000


Disadvantages of a self-build mortgage


  • The deposit size for a self-build mortgage can be higher with some lenders requiring deposits between 25 - 50%

  • Lenders will most likely require you to have the relevant planning permission ahead of applying for a mortgage

  • There can be more paperwork involved although working with a self-build mortgage specialist can help with this as they can manage it on your behalf

  • There are fewer lenders that offer this type of mortgage so your choice of rates may be lower in comparison to residential mortgages which are more common

Advantages of a residential mortgage


  • Depending on your circumstances, you may be able to get a residential mortgage with a deposit as little as 5%

  • There is typically less paperwork involved in comparison to the self-build mortgage process

  • You may qualify for one of the Government’s Help to Buy schemes which could help you onto the property ladder quicker

Disadvantages of a residential mortgage


  • Your property won’t be custom built

  • There may be less opportunity to make a profit 

How do I know which mortgage is right for me?

Comparing the pros and cons of a self-build mortgage or a standard mortgage is a good start but for a closer look that can provide you with specific and tailored steps, talk to an expert.


A mortgage broker who frequently arranges mortgages for self-build and residential borrowers can give you a detailed insight into the benefits of either option, while also highlighting negative aspects to be aware of. 


They’ll also know the stages involved with each mortgage and can advise you about how long and how much each stage may be.


Your experience as a builder or project manager may also play a factor when it comes to your decision and this is something our team can discuss with you. 


Building a property from scratch can be a lengthy process and may require a considerable amount of your time, whereas a readily built home could be more manageable.

Do I have a better chance of approval for a residential mortgage or a self-build mortgage?

The answer for one individual will be completely different to the next frustratingly.


Essentially, each mortgage lender offers different products, with varying terms, conditions and criteria to meet. 


For example, one lender may provide a residential mortgage to a borrower with bad credit, whereas a different lender offering a similar product may have criteria that restricts them from lending to that same borrower.


This is what makes the process of searching and comparing for mortgages so tedious, something our specialists are keen to resolve for borrowers.  


They work with you to get a real sense of who you are and what you need from a mortgage. Once they know what you need, they can compare the market finding the most suitable options. 

Which mortgage has the higher interest rate?

Another big difference between the two, is that interest rates for self-build mortgages can be higher than those offered on a residential mortgage because the risk associated with these types of loans is deemed greater by lenders.


If you were to default on a residential mortgage, the lender could repossess and sell the property to make their money back.


However, if you were to default on a self-build mortgage, the lender may have a harder time making their money back as selling an unfinished plot of land or property can be difficult. 


This could result in a big financial loss for the lender, which is why most adopt the approach of, “The higher the risk, the higher the interest rate.”

What’s cheaper, a self-build or residential mortgage?

Your personal and financial circumstances can impact the interest rate you pay for either mortgage too.


If the lender feels that you pose a risk as a borrower because of say, low income, their criteria could prevent them from offering a mortgage product with a more competitive interest rate. 


There are so many factors that could affect the costs associated with either option and without professional help and accurate calculations, it can be difficult to make an informed decision.


Your broker can compare the interest rates of numerous lenders for both residential and self-build mortgages, saving you the bother of using multiple comparison sites which aren’t always updated in real time.


They’ll also make you aware of any additional costs that may be associated with either option and calculate the most affordable route.

Finalising the figures

While it’s true that in certain circumstances, a custom-build project can be a cheaper alternative to buying a completed build, this isn’t always the case. 


If you’re thinking of building your own home, remember that there are other costs to include such as:


  • The cost of the land

  • Planning permission (unless the land has been sold with the relevant permissions)

  • The cost of labourers and other contractors

  • Architectural costs including design, amends and final plans

  • Alternative accommodation while your new property is being built

Preparing to apply

Applying for any mortgage without knowing if you’re likely to be accepted would be a huge mistake! If you apply to an unsuitable lender and end up getting rejected, you could damage your credit report making you less appealing to future lenders.


Our mortgage brokers know the criteria that the leading lenders in the UK will require you to meet, as well as the smaller, more specialist lenders who may be able to provide more flexibility.


Using their experience, they can prepare you for the mortgage application process which may involve questions about your:


  • Income

  • Outgoings

  • Job 

  • Debt 

  • Credit History

  • Deposit size 

  • Number of dependants

  • Age


This can feel a little daunting but answering with accurate information can help your broker find the best mortgage deal for you, whether that be for a self-build or a traditional mortgage.


Preparing ahead with your mortgage broker can also make the application process a lot smoother, especially with the knowledge that they’ve checked your eligibility already. 

Is it better to buy or build a house?

No one can answer this for you but practical advice from people who know the processes for each mortgage can help you with your decision.


You can chat live to a member of our team via The Mortgage Hut website if you have further questions or alternatively feel free to call us on 02380 980304.



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