Getting mortgages for new construction

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Mortgages for new construction

Mortgages for new construction are an essential component for anyone looking to bring their dream home from blueprint to reality or for entrepreneurs aiming to develop commercial properties. Navigating the intricate world of construction finance can be daunting, with various options for purchasing land, understanding the staged release of funds, and ensuring you meet the criteria for valuation and approval.

This guide is designed to demystify the process, providing clear insights into securing the land for your project, managing the flow of funds through to completion, and tackling the valuation steps required for progressing your construction mortgage. Whether you’re planning a bespoke residential property or embarking on a commercial development, understanding the ins and outs of construction mortgages will lay the foundation for your project’s success.

What is a construction mortgage?

AA construction mortgage is often referred to as a self-build mortgage in the UK. This form of financing is essential for those who are looking to build a property from the ground up rather than purchasing one that has already been built.

The process begins with the borrower securing a loan from a mortgage lender, which is then paid out in predetermined installments at each significant phase of the construction. These phases could include laying the foundation, framing, roofing, and finishing interior and exterior work.

After the completion of each stage, an inspection is usually conducted to ensure that the construction meets specific standards and milestones. Upon satisfactory completion of the inspection, the lender releases a portion of the funds directly to the builder. This method ensures that the construction is financially manageable and that the funds are being used appropriately at each stage of the build.

Once the construction is fully completed, the construction mortgage often converts into a regular mortgage, or what is known in the industry as an “end loan.” At this point, the borrower will start making regular payments back to the lender, similar to any standard mortgage arrangement. These payments typically cover the principal and the interest, and the terms of repayment are agreed upon in the initial loan agreement. It’s important for borrowers to have a clear understanding of when and how much they will need to repay, as well as the duration and interest rate of the loan, to plan their finances effectively as they transition from construction to homeownership.

Learn more: Self-build mortgage

How do they differ from standard mortgages?

Construction mortgages differ from standard mortgages primarily in how the funds are disbursed and the loan structure during the building phase. A standard mortgage, also known as a traditional mortgage, is used to finance the purchase of an existing home. In this scenario, the mortgage lender typically releases the full loan amount to the seller at closing, and the borrower begins to make monthly payments on both the principal and interest immediately.

In contrast, a construction mortgage is designed to fund the process of building a new home rather than purchasing an existing one. The funds from a construction mortgage are not released in a single lump sum. Instead, they are disbursed in stages or “draws” throughout the construction process. After the borrower reaches a certain construction milestone, the lender will release a portion of the funds to pay for that phase of building. This drawdown approach helps to minimise the lender’s risk and ensures that funds are being used appropriately for the construction.

Another significant difference is in the repayment schedule. During the construction phase, borrowers often only pay the interest on the money that has been drawn to date, rather than paying down the principal. This interest-only payment period allows for more financial flexibility while the borrower may also be covering the costs of alternative living arrangements until the new home is ready. Once construction is completed, the loan typically converts to a standard mortgage, and the borrower will begin to pay down both the principal and the interest, similar to a traditional mortgage repayment schedule.

Moreover, construction mortgages often require a higher level of scrutiny and involvement from the lender. Lenders may conduct periodic inspections to ensure that the construction is proceeding on schedule and according to plan before releasing subsequent funds. This is different from a standard mortgage arrangement, where lender involvement typically ends after the loan is disbursed and the property is transferred to the buyer.

Finally, construction mortgages are usually considered to be higher risk than standard mortgages. As a result, they may come with higher interest rates and require a more substantial down payment, as well as a detailed construction plan and budget before approval. These factors all contribute to the unique nature of construction mortgages when compared to their standard counterparts.

What is the process of a mortgage for new home construction?

The process of securing a mortgage for new home construction can be intricate and typically involves the following steps:

Pre-qualification and pre-approval: Before you begin, it’s advisable to get pre-qualified and then pre-approved by a lender. This involves assessing your finances to understand how much you can afford to borrow. Pre-approval is more thorough and can give you and the builders confidence in your budget.

Selecting a builder and creating a plan: You need to choose a licensed, reputable builder. Many lenders will require this as part of their risk assessment. You’ll also need detailed plans for your new home, as the lender will want to see what is being built.

Applying for the construction mortgage: With your builder selected and your plans ready, you’ll apply for the construction loan. The lender will assess your creditworthiness, the details of your building plan, the projected value of the finished home, and the credibility of the builder.

Loan underwriting: During underwriting, the lender evaluates the risk of loaning you money for construction. This process may involve appraising the building plans, checking the builder’s credentials, and ensuring the project’s budget is reasonable and within market norms.

Closing the loan: Once the loan is approved, you’ll close on the construction mortgage. This process involves signing all the necessary paperwork and paying any closing costs. At this point, the loan is in place, and construction can begin.

Construction phase with draws: The construction mortgage funds are distributed in a series of draws coinciding with various phases of the build, such as foundation laying, framing, and finishing work. Before each draw is released, inspections are conducted to ensure the stage is completed as planned.

Interest-only payments: During the construction, you typically pay only the interest on the amount of money that has been drawn. This can help manage out-of-pocket expenses during the building process when you might also be paying for temporary housing.

Completion and final inspection: Upon completion of construction, a final inspection is conducted. If everything is up to code and the build is completed as agreed upon, the project moves into the next phase.

Converting to a permanent mortgage: Often, a construction loan is structured as a “construction-to-permanent” loan, which means that it automatically converts into a standard mortgage upon the completion of the building process. At this point, you would start making regular payments on the principal and interest based on the total loan amount.

Move-in: Once the mortgage is in place and all financial and legal formalities are settled, you can move into your newly constructed home.

The exact process can vary depending on the lender and the type of construction mortgage you choose. It is essential to work with a lender experienced in construction loans, as they can guide you through the specifics of this pr

How much can you borrow?

The amount you can borrow for new home construction using a construction mortgage in the UK typically depends on several factors including your financial circumstances, the value of the land you’re building on, the projected costs of construction, and the anticipated value of the finished home. Lenders will carefully assess each of these elements to determine the maximum loan amount they are willing to provide.

Firstly, your personal finances play a significant role. Lenders will look at your income, employment stability, existing debts, and your credit history to evaluate your ability to repay the loan. They will also consider your existing assets and the amount of down payment you can make. Generally, the higher your income and the better your credit score, the more you can potentially borrow, provided it is within reasonable limits of your financial situation.

Secondly, the cost of the project itself is crucial. Lenders will require a detailed breakdown of the construction budget, which should include all costs associated with building the home. This will usually need to be supplied by the contractor or the builder who is carrying out the work. The lender will also want to ensure that the budget is realistic and includes contingencies for unforeseen expenses.

Additionally, the value of the land you’re building on will be considered. If you already own the land outright, its value may contribute towards your equity in the project, potentially allowing you to borrow more. If you’re purchasing the land with the construction loan, the combined cost of the land and construction will be factored into the loan amount.

Appraisals also play a role. Lenders will appraise the plans for your new construction to estimate the future value of the home once it’s completed. They typically lend a percentage of this appraised value, which can vary but often ranges up to around 75%-80% for self-build mortgages.

It is important to remember that lenders are typically cautious with construction loans due to the inherent risks involved with building projects. They may apply more stringent lending criteria than with standard residential mortgages.

To understand how much you can specifically borrow, it would be wise to consult with mortgage advisors or lenders who specialise in construction mortgages. They can provide you with a tailored assessment based on your unique financial situation and the specifics of your construction project.

Learn more: Can you get a mortgage on land?

How much deposit do I need?

The amount of deposit required for a construction mortgage in the UK can vary depending on the lender’s policies, the type of construction loan, the cost of the project, and the borrower’s financial circumstances. However, as a general rule, you can expect to need a larger deposit for a construction mortgage than for a standard residential mortgage due to the greater risk associated with building a new home.

Typically, lenders may require a minimum deposit of 20-25% of the land cost and the estimated construction costs. This can sometimes be higher, especially if the project is considered to be high risk or if the borrower’s credit history is less than ideal. Some specialist lenders might accept a lower deposit if you have additional security to offer or if the project and your financial situation meet certain criteria.

It’s worth noting that if you already own the land on which you plan to build, and it has no outstanding mortgage on it, the land’s value can sometimes be used in place of a cash deposit. This can significantly reduce the amount of additional cash needed upfront.

For those who are looking for ways to reduce the upfront costs, it’s also worth investigating whether you qualify for any government-backed schemes or incentives designed to help with home construction. For instance, schemes like the Help to Buy: Equity Loan or self-build initiatives can sometimes be used to reduce the deposit required.

It is always advisable to speak with a financial advisor or mortgage broker who specialises in construction mortgages to get accurate information tailored to your situation. They can provide detailed advice on the deposit requirements and help you understand all the associated costs of a self-build project.

Learn more: What is a self-build mortgage, and can I get one?

Which lenders offer construction mortgages?

In the UK, construction mortgages – often referred to as self-build mortgages – are a niche product and are not offered by all lenders. High street banks might have limited options, and often, building societies and specialist lenders are the go-to institutions for these types of loans. It’s always best to research the current market or consult with a mortgage broker who can provide you with updated information about lenders who are active in the self-build mortgage space.

Some well-known building societies and specialist financial institutions that have offered construction or self-build mortgages in the past include:

Nationwide Building Society: Nationwide has provided self-build mortgages for people building their own homes or undertaking a significant renovation project.

The Ecology Building Society: They are known for focusing on environmentally-friendly construction projects and renovations, offering mortgages tailored for these purposes.

BuildStore: BuildStore is a specialist in the self-build sector and offers a range of products through its Accelerator mortgage scheme, catering specifically to self-builders.

The Loughborough Building Society: They offer self-build mortgages for new builds, conversions, and renovations, with various stage payment options.

Bath Building Society: Bath Building Society provides mortgages for self-build projects with stage payments based on work in progress.

Furness Building Society: Furness offers a self-build mortgage product with stage payments linked to the progress of the build.

Saffron Building Society: Saffron offers self-build mortgages and caters to a range of building projects, including new builds and conversions.

Hanley Economic Building Society: Hanley Economic provides self-build mortgages with flexible stage payments to suit the borrower’s project.

It’s important to note that the availability of construction mortgages can change over time due to shifts in market conditions, lender appetite, and regulatory changes. Additionally, lenders will often have specific criteria that the borrower and the project need to meet to qualify for a loan, and the terms of these mortgages can vary significantly from one lender to another.

Given the complexity of construction mortgages, it’s highly beneficial to work with a mortgage advisor or broker. They can help navigate the market, compare different mortgage products, and connect you with a lender whose products best suit your needs. Brokers have access to a wide range of lenders, including those that do not directly deal with the public but offer competitive construction mortgage products.

What’s the difference between a regular mortgage and a loan for new construction?

Regular mortgages and construction loans are both financial products used to purchase or build a home, but they serve different purposes and have different structures.

Regular mortgages:

Purpose: Regular mortgages are designed for the purchase of existing properties. When you buy a house that is already built, you use a regular mortgage to finance the purchase.

Disbursement: The loan amount is typically disbursed in a single lump sum to the seller of the house at the time of closing.

Payments: Borrowers start making monthly payments immediately, which usually include both the principal and interest.

Structure: These loans often come with a variety of terms, such as fixed-rate or adjustable-rate, and can last anywhere from 10 to 30 years.

Approval process: The approval is based on the borrower’s creditworthiness and the value of the property being purchased.

Construction loans:

Purpose: Construction loans are used to finance the building of a new home or substantial renovations to an existing property.

Disbursement: The loan amount is released in stages as the construction progresses. Payments, known as “draws,” are made to the builder at each milestone.

Payments: During the construction phase, the borrower may only be responsible for paying the interest on the money that has been drawn. Once construction is completed, these loans can be converted to a regular mortgage, at which point the borrower begins paying down the principal as well.

Structure: Construction loans are typically short-term loans with higher interest rates, intended to last only for the duration of the construction process. They may require refinancing into a regular mortgage upon completion of the build.

Approval process: The approval is more complex and involves evaluating the borrower’s financial stability, the builder’s qualifications, and the construction plans and timelines.

In summary, the key differences between a regular mortgage and a construction loan are related to the purpose of the loan, how and when the funds are disbursed, the payment structure during the term of the loan, and the approval process. Regular mortgages are more straightforward and are meant for purchasing existing homes, while construction loans are tailored to facilitate the building process with multiple disbursements and payments typically starting out as interest-only during construction.

What are the pros and cons of a new build mortgage in the UK?

Securing a new construction mortgage in the UK to build your home can be a fulfilling venture, but it also comes with unique challenges and considerations. Here are the pros and cons of opting for a new construction mortgage:


Customisation: You have the opportunity to design and build your home exactly to your specifications. This means you can create a home that fits your personal preferences and lifestyle needs.

Modern living: New constructions are built with the latest building standards and materials, often resulting in a more energy-efficient and eco-friendly home compared to older properties.

Warranty and reduced maintenance: New builds come with a 10-year warranty from providers like the National House Building Council (NHBC), giving you peace of mind. Additionally, new homes typically require less maintenance in the first few years after construction.

Staged payments: With a construction mortgage, you don’t have to release the entire sum of money upfront. Payments are made to the builder in stages, which can aid your cash flow during the construction process.

Interest-only options: During construction, you may only have to make interest payments on the money drawn down, which can help manage living expenses if you’re also covering rent or another mortgage.


Complexity and risk: The process of securing a construction mortgage is more complex and can be riskier than for a standard mortgage due to the potential for construction delays, cost overruns, and issues with contractors.

Higher deposits: Typically, construction mortgages require a higher deposit compared to standard mortgages — sometimes up to 25-30% of the total project cost.

Higher interest rates: The interest rates on construction loans are often higher than those on traditional mortgages, reflecting the higher risk to the lender.

Strict criteria: Lenders may have stringent criteria for granting a construction mortgage, including detailed plans, a fixed-price building contract, and sometimes restrictions on the builders or contractors used.

Cash flow challenges: Managing cash flow can be challenging. You’ll need to ensure you can cover the mortgage payments in addition to potentially paying to live somewhere else during the build.

Potential for negative equity: If there is a downturn in the property market during the build, or if the project goes over budget, there’s a risk that the finished home could be worth less than the cost to build it.

Refinancing requirement: Some construction loans require refinancing into a standard mortgage after the construction is complete, which means additional closing costs and the risk of interest rate changes.

Before embarking on a project financed by a new construction mortgage, it’s crucial to do thorough research, budget carefully, and consider whether the advantages outweigh the disadvantages for your personal and financial circumstances. Working with a financial advisor and a mortgage broker who specialises in construction mortgages can also help navigate these complexities.

What are the best mortgage rates available for new construction loans?

The current landscape for mortgage rates for new construction loans in the UK offers a range of options, with some tailored specifically for self-build projects. A few mortgage lenders are offering competitive rates at 3.90% for such mortgages, which may be particularly attractive for larger loans with an arrears cost-based self-build mortgage setup.

It’s crucial to note that mortgage rates can fluctuate based on several factors, including the borrower’s creditworthiness, the size of the loan, the term of the loan, and the overall market conditions. Prospective borrowers should consult with mortgage advisors or conduct thorough comparisons using up-to-date tools to ensure they’re getting the best rates available at the time of their application.

What is the eligibility criteria?

For new construction loans in the UK, the eligibility criteria can vary depending on the lender and the specific mortgage product. Generally, borrowers are expected to meet certain income thresholds, credit scores, and deposit requirements. For instance, under the

First Homes scheme aimed at helping first-time buyers and key workers, the household income must not exceed £80,000, or £90,000 in London. Additionally, the value of the property being purchased should be £250,000 or less, or £420,000 or less in London. The Mortgage Guarantee Scheme, on the other hand, allows buyers to purchase a new-build home with a 5% cash deposit and a 95% mortgage, catering to first-time buyers and home movers.

Lenders will also assess the borrower’s creditworthiness, and typically, a higher credit score can improve eligibility and the terms of the loan. The loan-to-value (LTV) ratio is another critical factor, with some competitive rates being offered at a maximum LTV of 60%. It’s important to note that these schemes and criteria can be subject to change, and prospective borrowers should check the latest requirements and seek financial advice to understand their eligibility fully.

Do I need professional advice for the best mortgage lenders?

Seeking professional advice when looking for the best mortgage lenders for new construction loans can be highly beneficial. Mortgage advisors have specialised knowledge of the market and can provide tailored advice based on your financial situation and goals. They can help navigate the complex array of products available and identify lenders who offer the most competitive rates and favorable terms that align with your project’s specifics.

Working with a professional can also save you time. They can handle much of the legwork involved in the mortgage application process, from initial inquiries to the final application. They’re adept at interpreting the fine print and can explain the implications of various terms and conditions, ensuring you’re fully informed before making decisions.

Moreover, mortgage professionals have access to exclusive deals that may not be directly available to the public. Their relationships with lenders can also facilitate negotiations for better rates or more flexible terms. Considering that new construction loans can come with different stipulations than standard mortgages, having an expert who understands these nuances can be crucial.

While it’s possible to conduct your own research and comparison shop for mortgages, the intricacies of construction loans—such as drawdown schedules, arrears or advance stage payments, and dealing with construction timelines—can be complex. Professional advice can help mitigate risks and ensure that the financial product you choose is the best fit for your new construction project.

How can I compare the best mortgage rates for new construction in the UK?

Comparing the best mortgage rates for new construction involves a multi-step process:

Research online: Start by using online comparison tools which aggregate and update mortgage rates from various lenders. These platforms allow you to input specific details about your situation and what you’re looking for in a loan, providing a range of options that you might qualify for.

Check specific lender offers: Look at the websites of banks, credit unions, and mortgage lenders directly. Some may offer special deals or rates for new construction loans that are not listed on comparison sites.

Consider government schemes: Investigate whether you are eligible for government-backed schemes, such as the First Homes scheme or the Mortgage Guarantee Scheme in the UK, which can offer favourable terms.

Read the fine print: Ensure that you look beyond the headline interest rate. Check the Annual Percentage Rate of Charge (APRC), which includes fees and additional costs associated with the mortgage, to understand the true cost of the loan.

Consult professionals: Contact a mortgage broker or financial advisor. These professionals can offer advice tailored to your specific needs and may have access to exclusive deals.

Review terms and flexibility: Consider the flexibility of the mortgage terms, such as the ability to make overpayments or take payment holidays, and how these might align with the construction timeline and your personal circumstances.

Calculate overall costs: Use mortgage calculators to estimate monthly payments and total costs over the life of the loan, taking into account interest rates, fees, and any incentives like cash back.

Check eligibility criteria: Ensure that you meet the eligibility criteria for the mortgages you’re considering, which can include credit score requirements, income levels, and the size of your deposit.

By conducting a thorough comparison and possibly consulting with a financial advisor, you can identify the best mortgage rates and terms for your new construction loan. Remember that the lowest rate is not always the best deal if it comes with restrictive terms that do not suit your project or financial situation.


Can you get a mortgage to buy a building site?

You can get a mortgage to buy a building site, often referred to as a land mortgage or a self-build mortgage. These are designed for those who want to buy a plot of land either to build a house immediately or in the future. The lending criteria for such mortgages are typically more stringent than for residential mortgages, with higher deposit requirements and more detailed scrutiny of the building plans.

What are the stages of releasing funds for a new construction mortgage?

The funds for a new construction mortgage are usually released in stages as the build progresses. These are typically:

Initial purchase: Funds are released to purchase the land or to pay for the initial groundworks.

Construction milestones: Subsequent payments are linked to specific construction milestones, such as completing the foundations, reaching the roof level, and making the property watertight.

Completion: The final instalment is released once the property is completed and all inspections and certifications are in place.

How does the valuation process work for a new construction mortgage?

The valuation process for a new construction mortgage involves assessing the value of the completed property based on the plans, the land’s value, and the construction cost. Lenders may require interim valuations at each stage before releasing further funds to ensure that the build is proceeding according to plan and that the value is in line with the costs.

Can I get a construction mortgage to build commercial property?

Yes, you can get a construction mortgage to build a commercial property. This type of financing is typically provided by commercial lenders and is known as a commercial construction loan or commercial mortgage. The terms, conditions, and lending criteria for commercial construction loans can be quite different from residential mortgages, with potentially higher interest rates and different loan-to-cost ratios. It’s often necessary to provide a more detailed business plan and financial projections for commercial loans.

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