I would concur with maxsteam in the main, except that it is likely that re-mortgaging in full would prove preferable at the moment. Second charge lending is generally at a higher rate than regular mortgages and it would normally prove more beneficial in these circumstances to swallow the penalty (probably not more than £1800 or so) in order to get the cheapest residential rate.

As he says, funding the majority of your self-build in this way would make it very easy to get a self-build mortgage from a specilist lender to complete the project further down the line.

seasider72:

What are my best options? I would prefer to keep my 1st house if possible as an investment for the future.

You can either take out a second mortgage on the first property or take out one large mortgage to pay off the £65k as well. It is possible that the early repayment fee will make the first option preferable.

If you talk to an independent mortgage adviser (s)he will confirm the details but if you could take up your total borrowing on the first property to £300k, you could repay the £102k and have finance to get started with your planned demolition and self build. Once you have this finance and planning permission, you might be able to get a self-build mortgage that would let you complete the project.

Obviously you do not want to start such a project unless you were fairly sure that you will be able to complete it so it is important that you discuss the plan and anything that could prevent completion for the self-build mortgage with an independent mortgage adviser or two as well as with the planning department of your local council.

I currently have two mortgages with the same mortgage lender, for two seperate properties.

The 1st property is the house I currently live in and has 5 years left on a mortgage with an outstanding value of £65,000. The current house value is ~ £400,000.

The 2nd property is one I purchased last year and has a 25 year mortgage with an oustanding value of £102,000.

My intention was to knock down the 2nd property (as it is in a very dilapidated state) and perform a self build, which would cost around £350,000.

The mortgage lender in question knew of this when I took the 2nd mortgage out on the house, but have now turned round and said I cannot knock the building down until I repay the full £102,000 mortgage on it, and, they no longer offer a self build mortgage so I cannot transfer to that with them.

My dilema is therefore do I sell my first house to pay off both mortgages, so that I can fund the self build myself or do I remortgage the 1st house and take some equity out of it to pay off the mortgage in full on the 2nd house and then take out another mortgage for the self build?

What are my best options? I would prefer to keep my 1st house if possible as an investment for the future.

Thanks