Our grand design: One couple's innovative scheme to build amazing homes in their back yard

You can't get much more Dickensian than Bermondsey Street, just south of the Thames in London. Although it's now a busy road packed tight with a mix of 18th-century houses, warehouses and 20th-century infill developments, the Victorian novelist would probably still recognise it as the same thoroughfare which runs close to the Marshalsea prison, where his father was banged up. From the smart façades it's sometimes hard to tell which buildings are old and which are new, but once inside numbers 74 or 76, it's clear that you are entering a little piece of history.

These two houses, built between 1720 and 1730, have been lovingly restored over the past six years by designer Amanda Menage and artist Robert Mosley, who bought them in a state of dereliction. The couple, now 47 and 51, met when they both bought loft apartments in the street in the late 1990s. Menage, who studied architecture as a mature student, bought number 74 in 2001 as a project to test out her nascent skills. The couple so enjoyed the process that Mosley was inspired to buy number 76 a year later. Everything seemed perfect as the couple lived and worked together on the houses until 2003, when disaster threatened to strike.

It emerged that the woman who had originally sold them the properties was seeking planning approval for a three-storey residential development on the narrow cobbled mews abutting their rear walls. "It was completely hideous," says Mosley, "and far too big." The project would have blocked out most of the light from the Georgian houses, and stopped them ever having gardens. Menage and Mosley offered to buy the land, but the seller was only prepared to accept a developer's price of £400,000.

The couple decided to borrow the money – some £1.1m, including the land, building costs and fees – and develop the site themselves. So began a three-year project which has resulted in the innovative scheme which is one of the many entries in this year's Grand Design Magazine Awards, to be announced on 8 June.

"We're not builders or developers," says Menage. "Even though everybody said we should build flats, the only way we could approach the project was by imagining what we would want to live in ourselves." So from an early stage Menage was keen to squeeze two houses on the site, as well as a studio for Mosley, but leave enough space for a courtyard garden behind number 76 (they sold number 74 to ease the strain).

The irregular shape made this a challenge. A breakthrough came when an architect friend, Emma Doherty, suggested creating an access passage between the new houses so that the front doors could be off the street. "After that it all came together," says Menage of the three-storey houses, which each have two bedrooms on the ground floor, kitchen/diners on the first floor and sitting rooms and roof terraces at the top.

When choosing materials, wood was the first choice. "We liked the idea of weatherboarding because many of the houses here originally had it," explains Mosle. The couple wanted the new houses to be as green as possible, and timber from sustainable sources has the right credentials. It also made sense to try and achieve as much prefabrication as possible to save time and money. After much research, the couple found Riko, a company in Slovenia which agreed to make and assemble all the structural elements for less than £400,000. Mosley then worked on the fit-out, installing under-floor heating, kitchens and bathrooms. So striking were the completed houses that over 1,500 people visited them during last year's Open House weekend and both were quickly sold.

All of this makes the project sound simple, but complications of planning, licences and logistics caused plenty of heartache too. Hiring a professional – Architects in Residence – helped, but was it all worth it? "We didn't make a cash profit," says Menage. "But we gained a garden and a studio, which was the whole point, and that adds value to our house too."