Rachel Lacey
Tim Leonard
Many or all of the products and brands we promote and feature including our ‘Partner Spotlights’ are from our partners who compensate us. However, this does not influence our editorial opinion found in articles, reviews and our ‘Best’ tables. Our opinion is our own. Read more on our methodology here.
Releasing equity to buy another property may be an option if you’ve owned your home for a while and want to buy a second home. According to Nationwide, average property prices in the UK in early 2024 were 46% higher compared with 10 years before. So if you’ve been on the property ladder for some time, your home could be a rich source of cash.
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
Releasing equity to buy another property
Working out how much equity you have in your existing home will help determine whether you’re in a position to release funds to buy another. A simple way of estimating your house equity is to subtract the amount you still have left to pay on your mortgage from the current value of your home.
One way to unlock this equity is to sell up and downsize to a cheaper property, potentially leaving you with funds left over. The downsides are the various costs and effort involved with moving, and it may be that you don’t want to move.
If you’d rather remain in your current home, you may be able to remortgage and ask to borrow more than the amount you currently owe on your mortgage. Or if you’re an older homeowner, aged 55 or over, who either can’t or doesn’t want to remortgage, equity release may be an option to consider too.
Remortgaging to buy another property
If you want to remortgage to buy another home it will likely depend on you qualifying for a suitable remortgage deal and proving you’re able to afford to borrow more. Because of the additional borrowing, how remortgaging works in this instance is similar to taking out a mortgage for the first time.
How much equity can be released to put towards a second property will depend on the amount you’ve built up, the value of your existing property, and your finances generally, including your income, expenditure, debts and credit score.
You may be able to remortgage with the same lender you’re already with, but it’s usually best to check what other lenders are offering too.
» MORE: How to remortgage to release equity
What type of second property are you buying?
Whether you’re looking for a bolt-hole by the beach or investing in a buy-to-let, you’ll need to be honest with your lender about your plans for the second property. This will affect the type of mortgage you need on that property.
If you’re buying another property to rent out to tenants, you’ll need a buy-to-let mortgage. Or if you want to rent out the home you live in and buy a new place to call home, it’s called let-to-buy.
There are also specialist holiday let mortgages if you’re buying somewhere to rent out some of the year to holidaymakers and guests. But if you’re buying a holiday home, which only you, your family and your friends will use without charge, a second residential mortgage is usually what you need.
There are also often different expenses and tax implications involved with buying a second property. For instance, in England and Northern Ireland you may have to pay an extra 3% on top of the stamp duty rates usually charged when buying an additional property (in Scotland, you may have to pay an extra 6%). And rental income is liable for income tax wherever you are in the UK.
» MORE: See current mortgage rates
Using equity release to buy a second home
If you’re an older homeowner, using equity release to buy another property is a potential alternative to remortgaging to raise funds. It can sometimes be more challenging to get a mortgage as an older borrower, so if you’re aged 55 or over, a type of equity release called a lifetime mortgage may be worth considering. It may be possible to use the money released to buy a second home, a buy-to-let property to rent out, or a holiday home in the UK or overseas.
A lifetime mortgage allows you to release some of the equity in your property without having to make any immediate repayments. Instead, the amount borrowed is usually repaid by selling your home after your death or if you move into long-term care.
However, using equity release for any reason is never a decision to be taken lightly. Interest rates tend to be higher than for standard residential mortgages, and the amount you owe can quickly build up if you’re not paying the loan back as you go. And once your debt is repaid there’ll be less, or perhaps even nothing, in the value of your property to pass on as an inheritance. Your eligibility for some means-tested benefits may be affected too.
» MORE: Equity release or remortgage: Which is right for you?
Should I release equity to buy another property?
Releasing equity to buy another property, whether through remortgaging or equity release, may be an option if you own a good amount of equity in your home. However, the complexities and potential risks involved mean seeking mortgage advice is almost always going to be a good idea. The extra considerations that come with lifetime mortgages or any form of equity release means you will always need to get financial advice before using equity release to buy a second home, or for any other purpose.
» MORE: Getting mortgage advice
Image source: Getty Images
Dive even deeper
How to Remortgage to Consolidate Debt
Remortgaging to consolidate debt involves borrowing more on your mortgage to pay off other debts. This can make it easier to manage debt and could help lower your combined monthly debt repayments. However, more debt is secured against your home and you could end up paying more interest overall.
How to Remortgage to Pay for Home Improvements
Remortgaging to pay for home improvements or an extension may be an option if you have sufficient equity in your property and can prove to your lender a larger mortgage is affordable. Your income, outgoings and job status are some of the factors typically looked at when deciding whether you can afford a mortgage.
Do You Need a Solicitor to Remortgage?
The legal expertise of a solicitor will be needed if you remortgage with a new lender but may not be necessary if you take out a new deal with your current lender.