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Financial Dictionary - Self-build mortgage

Self-build mortgage

A self-build mortgage is used to finance the construction of a new home and not the purchase of an existing home. In other words, it is a loan to build a house for one's own use. These mortgages were traditionally intended for property developers, who would build the houses and then repay their debt to the bank as and when they sold them.

When it comes to self-build mortgages for individuals, the bank lends us money to finance a bespoke self-built home.

By building the house ourselves, we effectively cut out property developer costs and will have total freedom in designing the lay-out and choosing room sizes and materials. It is important to remember that self-build loans come with a set maximum amount and we must be sure not to exhaust these funds before the work is completed. If we do, we would also have to bear the interest.

How do I obtain a self-build mortgage?

Self-build mortgages have a number of unique features that differentiate them from a normal mortgage: the money is delivered differently, the price is somewhat higher and certain permits are also required.

Firstly, we must own a plot of land that is filed at the Land Registry (Registro de la Propiedad). We will then commission an architect to prepare the drawings and apply for approval from the Association of Architects (Colegio de Arquitectos). We will need to request a building permit (licencia de obras) from the local council (ayuntamiento) at which the construction drawings have been filed. And last but not least, we will need an Energy Performance Certificate, which will be issued during the execution phase of the project.

With all these documents (building permit, visa and energy certificate), the bank will assess the amount of money it thinks we will need (normally they will grant us up to 85% of this amount), and will calculate the interest rate and the mortgage term (up to 30 years, although it varies by bank). Aside from all these certificates, we will also have to undergo a solvency study (good earnings, job stability, savings capacity, etc.).

Once the loan has been approved, the bank will give us the money as the work progresses over a maximum term of two years, though split into several instalments: in the earthwork phase, it will deliver part of the credit (usually half) once approval has been granted for the work to commence. At the certification stage, the bank will continue to release funds as the build progresses and upon receiving the relevant completion certificates from the architect. As the build nears completion, the bank will deliver the final amount, which will be between 10 and 20% of the mortgage amount.

Is this type of mortgage valid for prefabricated homes?

Yes, and also for modular homes. In this case, the dwelling must be reliably anchored to the ground (i.e. it must not be mobile) and it will also require an approved set of construction drawings and building permit.