Who is the biggest single generator of new homes in the UK? In answer to such a question it would not be surprising to hear a barrage of builders’ names come raining down. However, the truth of the matter is that no one firm in the construction sector is more prolific than the United Kingdom’s self-build community.
The biggest builders in the market are constructing somewhere in the region of 12,000 to 15,000 houses each year, while self-builders are responsible for around 20,000 a year. This is a figure that is steadily on the up and according to a recent report from analyst Datamonitor, there has been an average annual growth of 5.3 per cent in the number of self-build properties between 2001 and 2005.
Self-build is not the preserve of people living in communes, do-it-yourself fanatics and the particularly brave or even stupid. It is easier, quicker and more cost-effective than most of us believe and
financing a mortgage for such a project has never been easier.
Before we get carried away, however, it is important to note that self-build is and will remain a niche market for the foreseeable future. At the moment it represents somewhere in the region of 1 per cent of all UK lending and it is unlikely this figure will balloon in the coming years. It will grow steadily, but there will be no charge by borrowers towards the market and neither brokers nor lenders should delude themselves otherwise.
Where real hope and opportunity lie for lenders in this market is in the fact there have been few new entrants and provider numbers have stayed fairly constant, with around a third of all lenders offering self-build products. Given the specialist knowledge required along with the volumes involved, this is unlikely to change. However for those in the market, there is a steadily growing amount of business to compete for.
For brokers, who account for over 60 per cent of the market, this means lenders are getting even more focused on their offering and looking at ways to improve and simplify the products they have. Lenders in the market are becoming more and more specialised and experienced at what they do and there have been some significant developments in the products on offer, the way they work and what they can provide for borrowers. In turn this means brokers should find it easier to access the market and serve their clients’ needs. As more and more clients come through the door looking for such advice, brokers turning their back on the self-build market will be turning their back on an easily serviceable and valuable revenue stream.
A viable service offering
In the past there have been a number of issues preventing many brokers from really entertaining self-build products as a viable string to their bow. Not only have they appeared complex, but given the varied requirements of self-build borrowers, it has often been difficult to find the right lender for each case.
However for intermediaries prepared to take a little time to investigate the opportunities now available to borrowers in this sector, they will soon find the market is readily accessible. Not only have individual lenders tailored their products to suit the needs of clients, altering criteria and stretching loan to value thresholds, but some have also partnered with specialist providers in the market.
In being one of the lenders on BuildStore’s BuildLoan scheme panel, TMB’s aim is to make life easier for brokers. There are two real advantages for intermediaries going through this scheme with monies being released in advance of each stage of the project rather than in arrears and information and advice being readily available in terms of planning and managing the project.
With products where money is only released in arrears, it means borrowers have to fund each stage of the project themselves. For many this will mean having to sell their home and live onsite or in rented accommodation while the project is underway or getting finance from the bridging market. This in turn has often created a whole new dimension of problems for brokers and made cases more complicated than they need be. Lending in advance simply does away with this.
For brokers worried that self-build clients will be demanding in looking for logistical help, specialists have a wealth of experience and knowledge and will be able to provide for all the needs of their clients. In turn this level of service and expertise will ingratiate much greater amounts of goodwill and favour than a mainstream mortgage ever could.
Repeat business
While the self-build sector may not pay brokers larger fees for their work, this is representative of the fact there is little if any extra work for them to be doing in this market. The real upside of servicing self-build clients, however, is that their needs are often greater in terms of both mortgage amounts and further services.
If we look at the figures, the average self-build mortgage is around £185,000 and the vast majority are below 75 per cent loan-to-value. This is well above average in terms of both the amount and the performance of the business being written.
During the project somewhere in the region of a third will also require short-term borrowing, and as the majority are high net worth individuals there will be a host of other needs that brokers can look to satisfy either through their own services or those of a partner IFA.
Nor is it purely new properties that the self-build market caters for. Given the shortage of land and the high numbers of vacant properties across the UK, the market for renovation and repair is quickly growing. The flurry of property programmes and media coverage in this area has been a huge driver of demand, but improving facilities from the mortgage market have shown borrowers the ease with which they can quickly turn their dreams into reality.
In 2005 there were over 200,000 planning applications made to convert or renovate existing properties. There is no doubt that many of these will have been financed through remortgage or equity draw down, but equally there is little doubt self-build products had a huge role to play and given the flexibility they offer, the fact they are specifically designed for such projects and the host of help and advice on offer with them, it is not surprising this is a very important and growing market for the sector.
One of the main reasons people become involved in renovation and extension is to add capital value to the existing property as it stands. For brokers one of the huge selling points of self-build mortgage finance is the savings to be made on the actual project itself.
There are two major tax breaks, which can make self-build a highly profitable option. The first is that the majority of VAT for materials and services is redeemable and so there is an immediate saving in the order of 17.5 per cent to be considered. Then, and perhaps uniquely in today’s housing market, the Stamp Duty laws actually work in favour of the buyer when it comes to self-build.
Stamp Duty is raised on the value of the plot of land or property originally bought for the project and not its end value. Therefore anyone buying a plot of land under the £125,000 threshold will not be liable for Stamp Duty, even though the property they go ahead to build is more than likely to be worth well into the 3 per cent bracket by the time they have finished. If the new property ends up being worth £350,000, this equates to a Stamp Duty saving of £10 500.
Established niche
Self-build has firmly established itself as an effective, well serviced and growing niche market. It offers savings, flexibility and well designed mortgages to its clients and has striven over recent years to ensure the proposition for mortgage intermediaries is easy to access, manage and advise on.
Looking to the future, rising house prices will continue to push more and more people into investigating options other than a straight house purchase and high on their list will be renovation, repair and self-build. It will not only be house prices driving this, but also the availability of many sub-standard and rundown properties and the environmental need to regenerate brownfield sites.
It is also likely that further tax breaks will be available in the future for properties which are energy efficient and there is no doubt that self-builds employ new technologies and operate to some of the highest standards in the market, putting their properties at the cutting edge of this movement.
It is unlikely mortgage intermediaries and advisers will be able to make an entire practice from servicing the needs of the self-build market, but refusing to entertain it at all given the options it offers clients, the ease with which it can be accessed and the growing volumes being seen, could turn out to be a costly mistake.
