To fund building your own home in the UK, there are several financing options available that are tailored to meet different needs. With the array of loan types having contrasting schemes of payment and eligibility criteria, this guide is designed to help you navigate the process and find out which type of loan is best suited for your building project.
The following types of home construction loans are the most commonly used in the UK for construction projects:
Self-build mortgages
These are specialised loans, designed for financing home construction. The main identifier for this loan is that the funds are released in stages as the project progresses.
Stage payment mortgages release funds at milestones like land purchase, foundation laying, wall construction, roofing and final completion. Other non-tangible milestones can be the completion of valuation reports, or interim warranties that confirm progress.
Repayment options
- Repayment Mortgages: Borrowers repay both the capital and interest
- Interest-Only Mortgages: Borrowers pay only interest during construction, with capital repayment starting later.
Eligibility criteria
In order to qualify for a self-build mortgage:
- You must be aged 18 or over and a UK resident
- Plans for the project must be made in adequate detail, with site drawings, cost estimates, and planning permission. This includes both the permission for land purchase and detailed permission for construction.
- A deposit is required, typically between 20%-40%, depending on the lender and the details of the project.
- Affordability checks are made, through proof of income. This can be through payslips, or at least 2-3 years of tax returns for self-employed applicants.
Costs & fees
Interest rates can vary by lender and product type. Certain eco-campaigning lenders offer variable rates, with discounts for energy-efficient builds. Fees may include application fees, which are typically around £800, valuation fees being typically £625, and fees per inspection costing around £100.
Advantages of self-build mortgages
This flexible funding source is tailored to the individual project needs. The staged disbursements allow for interest savings, compared to the disbursement of a single large sum. Furthermore, the land value itself can be used as collateral if owned outright.
Challenges of self-build mortgages
Compared to other options we will cover, self-build mortgages can have longer application processing times, often taking between 3 and 6 months. Applicants also take on the risk of cash flow issues, if delays occur between project stages. Finally, self-build mortgages have a higher deposit requirement compared to conventional mortgages.
Overall, self-build mortgages are ideal for those with detailed planning and financial management in place. Contacting a specialist like Rise Funding can simplify this process, ensuring you are given access to suitable products for your needs.
Help to Build equity loan scheme – no longer available
The Help to Build scheme was a UK government initiative designed to assist individuals in financing self-build or custom-built homes in England, and could have been used in conjunction with a self-build mortgage for a home construction loan.
The equity loan allowed you to borrow between 5% and 20% of the estimated land and build costs, extending to 40% for builds in London. The remaining cost (up to 95%) would have been covered by a self-build mortgage from a lender registered with the Help to Build scheme.
The Help to Build equity loan was aimed at individuals or families building their primary residence, but was withdrawn by the government on the 31st March 2025.
Construction loans
Construction loans are short-term financing solutions designed to fund the building or renovation of residential or commercial properties. They can be used for purchasing land, paying for labour, materials, permits and inspections. These are suitable for new builds, major renovations or conversions of existing properties.
Repayment options
Repayment of construction loans varies widely, depending on the type of loan and the lender, but generally come in the following categories.
- Interest-only payments: This typically only happens while the construction is ongoing, allowing cash flow to remain healthy during the building phase. Principal payments are then deferred until completion.
- Lump-sum repayment on completion: Borrowers repay the loan in full, including the principal sum and accrued interest, once the project has been finished. This option is best for short-term loans where repayment is expected from property sales, or expecting to be converted into a long-term mortgage.
- Conversion to permanent mortgage: Certain construction loans automatically convert into a standard mortgage once the project has been completed, eliminating the need for a new loan to be applied for. Repayments are then made regularly each month to cover both the principal sum and interest.
- Property sale: In some cases, developers repay their construction loans by selling the completed property.
Development finance
If you are looking to fund a larger-scale development, such as a commercial project, then development finance is more suited to your needs.
Development finance consists of a short-term loan, designed to fund aspects of property development projects, including the acquisition of land, construction cost and refurbishments.
Funds can be provided for residential, commercial, or mixed-use developments. This includes new builds, conversions, rebuild projects and large refurbishments. Their short-term nature often limits loan terms to between 4 and 36 months. Structure typically comes as two components, one loan for financing land acquisition and one loan in stage payments for development costs, released after project milestones.
Similar to construction loans, development financing is often repaid through property sales, refinancing into a longer-term mortgage, or by selling smaller parts of a multi-unit development. The exit strategy is a key factor in securing development finance, with lenders keen to see a direct pathway to repayment prior to agreement.
Types of development finance
- Standard development loan: This covers up to 100% of build cost and 60%-70% of the land cost.
- 100% development finance: Covers the entirety of the project, requiring additional security from another source of collateral. (e.g another property).
- Mezzanine finance: A secondary loan, supplementing any potential funding gaps left uncovered by the primary loan.
- Bridging finance: A short-term loan designed for smaller projects or pre-development work.
Eligibility for development finance
Development finance is typically only granted to experienced developers, with a proven track record of successful developments. In addition to this, the following criteria apply:
- Gross development value (GDV): the projected value of the completed project needs to be in line with the loan amount. Generally, costs shouldnt exceed 75% of the GDV.
- Deposits can range from 20% to 40%.
- As always, detailed project plans are required, with budgets, timelines and pre-sales agreements.
- A good credit history greatly improves the chances of approval and lowers interest rates.
Using loans to build a new business
If you are looking to use construction loans or development finance to fund the construction of a new business like a café or barbershop, the choice between these options depends on your specific needs, project stage and financial strategy.
A construction loan is best for funding the actual construction or renovation of a property, covering all costs associated with the construction phase. For those that already own the property, and only need funds for the construction or renovation, this may be more suitable.
If you need access to funding for a broader range of expenses, perhaps for both land acquisition and construction, then development finance offers more flexibility and comprehensive coverage, from initial stages until completion.
Finding a home construction loan
Building your own home or constructing your own business in the UK is an exciting prospect that comes with complex financial decisions. There are financing options out there to suit almost every type of build, each with their own structure, eligibility criteria and benefits. For expert guidance and ensuring you have access to the most suitable products, working with Rise Funding can help you simplify the process, and make the move your build from blueprint to reality.
Contact us via the form below, or get an instant quote through our online questionnaire.
