Fulfil your property dreams

Alison Hunt explores the cheapest way to get a dream home.

If, like me you secretly enjoy Channel 4's Grand Designs, you've probably dreamed of what it would be like to create your own self build property. Imagine how amazing it must feel to live in a home in the perfect location that was built to your specifications?

The average self-builder can make between 25 and 35 per cent worth of equity at completion, so it definitely can be worth the hassle - financially, at least.

But how do you go about it? lovemoney.com reader Shytehawk asked this very question recently using our Q&A tool:

"I own my own (small) home- I have a plot & need to finance a new build home. What's the best way to go about this?"

Self build mortgages

One option is to take out a self build mortgage. According to researcher Moneyfacts there are currently 23 lenders offering self build mortgages, including building societies such as Nationwide and Norwich & Peterborough.

This type of home loan is more complicated than a traditional mortgage, as in addition to the usual paraphernalia your lender will expect to see plans and projected building work costs. Depending on your lender, you'll also probably be expected to have full planning consent (you can find out more at the government planning site). And self build mortgages can charge considerably higher rates than best buy traditional mortgages.

Staged payments

Once your mortgage is agreed, the lender will release the funding in stages, either at the end of each building phase (the arrears stage system) or at the start (the advance stage system).

If your lender uses the arrears stage system you'll often find it won't hand over a penny until certain construction stages have been completed, and these stages can vary greatly from lender to lender.

What's more, you'll usually need to have a surveyor assess the work at each stage before payment will be released which can cause delays as well as cash-flow issues.

And you could find your lender withholds a certain sum until the property is completed - so you'll clearly need to have a fair amount of cash upfront to use this system.

A more streamlined method where cash flow is concerned is the advance stage system as funds are released prior to each stage. Plus no delays are caused by interim surveys, meaning this can be a good method for those wishing to self build that don't have vast quantities of cash upfront.

But with both types of mortgage you will usually have to pay product and arrangement fees, plus with the arrears system you'll have to pay the surveyor for each assessment, so you'll need to factor these costs into your calculations.

Best self-build mortgage deals

Speed is obviously of the essence in any self build as you'll be paying interest on whatever you have borrowed.

You will only incur interest on the money the lender has released - but as this sum will increase as the various stages progress, you'll obviously want to get the build completed to schedule.

Here's a round of some of the best self-build mortgage deals around at the moment:

These deals are at least one percentage point more expensive than the best variable mortgage rates on offer to standard borrowers, so be aware you are paying a premium to self-build. It's also worth noting that Ecology Building Society will only lend on 'eco-build', conversion and renovation projects.

So, there are definitely pros and cons to building your own home. On the one hand you'll create the perfect home in the perfect location for you - and by leaving out the middle man (the property developer) you'll save a fortune by only having to pay stamp duty on the land (which, if it costs less £175k, could mean no tax to pay).

What's more, you should be able to reclaim VAT on the building costs too (make sure you keep detailed receipts). And with talk of land getting cheaper due to demand from developers falling, you could really save some money.

On the other hand, anyone who has watched Grand Designs will know building your own home is no small undertaking - it takes a lot of hard work and dedication, which can be hard if you have a full-time job.

And don't forget, you'll need to be able to keep a roof over your head while the property is being built as well as potentially covering a mortgage for the build. This of course means covering another mortgage payment or rent each month, or choosing to stay with friends/relatives (or even living in a caravan or mobile home on-site - not easy if you have a family or if the build drags on for a year or more!).

But for thousands of us (including Shytehawk) who are willing to give it a go, building your own home seems to be worth all the trouble!

Cut your mortgage costs

If you want to cut your mortgage costs, the first thing to do is to watch this video: Getting through the mortgage maze.

Next, use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online, and adopt this goal: Cut your mortgage costs.

And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

Use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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