Rachel Lacey
When you apply for a mortgage, one of the lender’s priority will be to check that you can afford repayments. It does this by checking and verifying your income.
However, while earnings from paid employment are important to lenders, they do also consider income from other sources, including benefits. By law, lenders cannot discriminate against borrowers on benefits, who may be disabled or suffering from long-term illness.
Nonetheless, while lenders will consider benefits in their income calculations, borrowers still need to demonstrate they can afford the loan they are applying for. Unfortunately, if benefits are your only source of income, or have the potential to end, getting a mortgage may be difficult.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
What is a self-build mortgage?
A self-build mortgage is a type of land mortgage designed to finance the purchase of a plot of land and the cost of building a house, in which you will live, on that land. Whether you’ll be doing most of the building work yourself, or intend to use a specialist contractor, a residential mortgage – which is designed to finance the purchase of property that is already standing – is not suitable for funding the construction of a self-build home.
Unless you have a lump sum set aside to fund your building work outright, it’s likely you’ll need to secure a self-build mortgage to help finance your build. These specialist loans for building a home are designed to consider the differences and additional risks involved with the task at hand.
How do self-build mortgages work?
While the funds provided by a residential mortgage are released as a single lump sum, the monies delivered by a self-build mortgage are paid in stages or instalments, to help ensure that projects are continually funded as they progress.
As an example, a portion of the overall sum you borrow through a self-build mortgage could be released on completion of each of the following stages:
- buying the land
- putting in the footings and foundations
- erecting the walls
- adding the roof
- installing fixtures and fittings, and completion
By releasing the funds gradually, the aim is to help lower the risk posed to both borrower and lender that the money lent through a self-build loan will run out before the house is completed.
The different types of self-build mortgage
Self-build mortgages typically take one of two forms, and will depend on when a lender is willing to release each tranche of funds.
An arrears mortgage
Most self-build mortgages tend to pay out in arrears, releasing the relevant amount of funds after the completion of each designated stage of the build. Usually, a valuation expert sent by the mortgage lender visits the build site to check that the particular section of work has been completed as agreed, and to authorise the release of the funds to cover this stage.
It means that with a self-build mortgage that pays in arrears, you’ll normally need to have enough funds behind you to pay for each stage upfront before you get the money back from the lender. But if your available funds run out, it also raises the possibility of needing to find alternative finance to keep a project progressing until a stage is adequately completed for the cash from the self-build mortgage to be released. This could involve further borrowing, perhaps in the form of a bridging loan.
An advance mortgage
The second type of self-build mortgage involves the funds being paid out in advance of each stage of the build. This can prove a useful option if you don’t have the necessary money available to pre-fund your project. However, fewer lenders are willing to lend on this basis and if they do, the interest rates tend to be higher than on an equivalent self-build loan, which pays in arrears.
What are the advantages of self-build mortgages?
Some of the potential benefits of self-build mortgages include:
- It may be cheaper to build your own property rather than buy one already built.
- You pay stamp duty on the cost of the land, and not the value of your final property.
- You may be able to remortgage to a normal residential mortgage, potentially at a lower rate, once your build is complete.
- You get to plan and design your home to your own specifications, wants and needs.
What are the disadvantages of self-build mortgages?
Some of the potential drawbacks of self-build mortgages include:
- You normally need a larger deposit of at least 25% to get a self-build mortgage.
- Self-build mortgage rates are generally higher than on standard residential mortgages.
- There are fewer self-build mortgages available, which could make it harder to find a mortgage suitable for you.
- The funds are released in stages, which may cause cash flow problems if you budget incorrectly, overspend or face an unexpected expense.
- With an arrears mortgage, you’ll need to have enough money to hand upfront to complete a stage before the lender releases your funds.
- You may need to pay to live somewhere else while your home is being built.
- Lenders will want to see build plans, permissions, and detailed costings and budgets before offering you a mortgage.
- Building your own home and managing the finances is likely to take up a lot of your time and come with various stresses.
- There is a risk that things don’t go to plan, which could impact you financially and in terms of having somewhere to live.
How much deposit is needed for a self-build mortgage?
Typically, you’ll need a minimum 25% deposit for a self-build mortgage, much higher than is usually needed for a residential mortgage. However, sometimes this could rise to as much as 50% for larger and lengthier projects, potentially putting a significant dent in any capital you may have for the build.
» MORE: How much deposit should I put down?
How much are self-build mortgage rates?
Mortgage rates on self-build mortgages tend to be higher than on standard residential mortgages. This is mainly due to the extra risk lenders associate with self-build projects. However, once your property is completed, you may be able to remortgage to a standard mortgage. Always check if there are early repayment charges on your self-build mortgage first, as these can be hefty.
» MORE: Check current mortgage rates
Do you pay stamp duty on a self-build property?
Normally stamp duty is only payable on the cost of the land itself rather than the value of property once it has been built. Under current rules, you only pay stamp duty if you pay more than £250,000 for your land – this figure relates to residential stamp duty rates in England and Northern Ireland.
Stamp duty rates are different if the land you are buying is in Scotland and Wales. In Scotland, you need to pay Land and Buildings Transaction Tax if the land is worth more than £145,000. In Wales, Land Transaction Tax is payable if land costs more than £225,000.
There may be certain circumstances where non-residential stamp duty rates will apply for self-build plots. In this instance, tax only becomes payable if you buy land for more than £150,000 in England, Northern Ireland and Scotland. In Wales, non-residential property tax applies from £225,000, the same as for residential purchases.
It can be difficult to work out which stamp duty applies to your situation. For this reason, you may want to seek expert advice if you’re unsure how much stamp duty you need to pay.
» MORE: Learn about stamp duty
Is it hard to get a self-build mortgage?
Self-build mortgages tend to be more complicated to arrange than a standard residential mortgage, so you should expect to spend longer preparing the necessary documentation.
Before a self-build mortgage can be agreed applicants are usually asked to provide detailed build plans, drawn up by a reputable architect, and proof of planning permission for the build. As well as having a suitable deposit, you’ll also need to demonstrate that your sums add up in relation to the build costs, and that you have contingencies in place should you exceed your stated budget.
Most lenders who offer mortgages to build a house have a self-build mortgage calculator on their site to help. You may also need to reveal where you will live while your home is being built and how you will pay for this.
As with any mortgage application, your lender will want to see proof of your earnings. A good credit score may help secure an approval.
Self-build mortgages are not as readily available as residential mortgages, so you may find it beneficial to use a specialist mortgage broker to help you find a suitable lender. The professional support available from a mortgage adviser may also prove invaluable as you move through the process in general.
» MORE: Best mortgage lenders
What benefits are accepted by mortgage lenders?
Most lenders are likely to accept the following benefits:
- Attendance allowance
- Carers allowance
- Child benefit
- Disability living allowance
- Incapacity benefit
- Industrial injuries benefit
- Maternity allowance
- Pension credit
- Severe disablement allowance
- Widow’s pension
- Universal credit
However, it is important to note that not all the benefits listed will be accepted by every lender.
Some, for example, will only accept these benefits if you are employed or retired. And as many of these benefits can be payable to those on low incomes, they may not boost your income enough to get you through lenders’ affordability assessments.
Can I get a mortgage if I claim universal credit?
Universal credit is paid to people who are on low incomes, including people who are in work as well as those that are not.
You will have more chances of getting a mortgage on universal credit if you are in work, as you will have earnings to supplement your benefits, increasing your total income.
How to get a mortgage if you are ill or disabled
If you are disabled or suffer from long-term health problems, this should not prevent you from getting a mortgage. Anti-discrimination laws mean lenders cannot treat your application differently or impose different terms.
However, you will still need to prove you can afford the loan, so it’s important to get your paperwork in order to ensure you can demonstrate how much you have coming in each month, both from benefits and from earnings from work.
If affordability is an issue, it may also be worth exploring shared ownership schemes for the disabled. HOLD enables people with long-term disabilities to buy a partial share in a property, with a housing association purchasing the remainder. It is also worth contacting MySafeHome, which provides help and support to disabled people who wish to buy their own home.
Your local Disabled People’s Organisation (DPO) may also be a good source of information and support.
What about joint mortgages?
If you are looking to buy a home with a partner, friend or family member, it may be easier to get on the property ladder. This is because the lender will take their income into account as well, with most lenders offering a maximum of 4.5 times joint income.
» MORE: A guide to joint mortgages
What if I have bad credit?
If you are on a low income or on benefits, a good credit history should improve your chances of getting a mortgage.
If you have bad credit it will be harder, as fewer lenders will consider your application. However, that is not to say it is impossible, as much will depend on the severity of your credit problems and the amount of time that has passed since you experienced them.
How to find a lender
Whether you are claiming benefits due to health or disability problems, or because you are on low income, it makes sense to get specialist advice from an independent mortgage broker. Although some charge fees, many offer free advice, taking a commission from lenders instead.
Different lenders will approach benefits differently. Some, for example, will have a cap on the level of benefit income they will accept in an income calculation, while others may not. Some will consider different benefits to others.
A good broker will assess your situation and should be able to recommend the lenders most likely to accept your application. You may even be able to find a broker that specialises in mortgage applications for those on benefits.
In addition to recommending the right lender and the right product, a broker should also help with your application.
» MORE: Getting a mortgage on a low income
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