Building your own property means being able to construct your own home in the location of your choice while having a say in the design of the property so it fits the needs of your circumstances and lifestyle. With increasing numbers of people looking to build their own property, it is no surprise that one of the growth sectors in the last few years for both mortgage lenders and intermediaries has been the self-build market.
According to Datamonitor, there has been an average annual growth of 5.3 per cent in the number of self-build properties built in the last few years. To look at how much the self-build sector has grown, you only have to compare self-build figures with the output of some of the most well known builders in the UK market. The biggest builders are currently constructing somewhere in the region of between 12,000 to 15,000 houses each year, while self-builders are responsible for around 20,000 projects each year.
Nevertheless, compared to other sectors, the self-build market is fairly immature with only around one-third of UK lenders involved in the sector and offering a self-build product. However, the market is set to expand, even though this growth is likely to be slower compared to other niche areas such as buy-to-let and self-certification.
A changing market
Self-build is also a real opportunity for mortgage intermediaries who currently account for around 60 per cent of the market. So how can intermediaries make the most of the self-build sector?
In the past many brokers have shied away from the sector due to the complexity of the products on offer and the different requirements that each self-builder usually has. For the intermediary, it has often proved difficult to find the right lender to suit their client’s circumstances.
Now the market has changed and many lenders will now tailor their products to suit the individual needs of borrowers. There are also now more specialist providers in the market, such as Buildstore, which has a range of lenders on its panel.
Although there are not huge number of lenders operating in the market, those that do are providing a valuable service to those borrowers wanting to self-build, offering dedicated and specialist advice. Some are also now becoming more innovative in the types of products they are providing, offering self-certification and non-conforming products and also taking into account outside factors, such as rising interest rates.
For example, with interest rates increasing and many borrowers worrying about the effect this may have on their finances, BuildStore and TMB recently launched a two-year fixed rate self-certification mortgage for self-builds and renovations. Through the BuildLoan scheme, self-builders can borrow up to 95% of the purchase price of the land and up to 95% of the cost of the build in advance, providing cashflow during the project.
Under the BuildLoan advance stage payment mortgages, funds are released in advance of each stage of the project rather than in arrears which can be a feature of many other self-build mortgage products. Releasing funds in arrears can prove problematic for clients with many having to live on the site of their self-build project while it is completed, or have to commit to rented accommodation for a period of time.
With many products, the self-build mortgage can run alongside the existing mortgage your client has on their current house while they build their new home. This can be a more economical way of structuring your client’s finances than selling their current home and moving into rented accommodation. This is because as well as avoiding having to move house, the cost of rented housing is likely to be more than your client’s current mortgage.
Your client will also only pay interest on the amount they have actually borrowed. This means that as their self-build project progresses and they borrow more, their monthly interest payments will increase.
BuildStore can also assist with advice on funding through its BuildPlan service which provides estimated costings of both materials and labour. A detailed plan can also show the separate stages of the project and the break down of the works and costs within each stage helping your client work out how much money they will need at each stage of their self-build project.
Clients can also be helped with finding the right plot through services such as PlotSearch. The service features over 20,000 individual homebuilding projects, including single plots, properties to convert and multi-unit development sites.
Broker point of view
In terms of remuneration, some brokers have been put off by the self-build sector by the amount of work involved for what can be perceived as an unequal return. However, although it is true that the self-build sector is unlikely to pay brokers higher fees for their work, there are other longer-term benefits of advising a self-builder. First, their requirements are likely to be more complex and some require short-term funding, such as bridging facilities. Second, the self-builder is likely to have a higher income than other clients which means there is real opportunity for offering other, additional services.
In the past, many self-build lenders would only provide up to 70 per cent of the property’s value but now there are some specialist providers that will provide up to 100 per cent loan-to-value of a self-build mortgage. In these circumstances, some lenders may ask for additional security such as a second charge over a property already owned by the client. There are now also products available for those builders wishing to invest in self-build developments, where the property is to be used for buy-to-let purposes once completed.
Deterrents
Although it is predicted that the self-build market will grow steadily in the next few years, it is likely that it will still remain a niche area for the foreseeable future. The availability of land may hinder the growth of the sector and much depends on whether the government manages to persuade local authorities to allow more planning permission for self-build projects, therefore releasing more land to build on.
The price of land may also deter many self-builders from entering the market. However, theses costs can be mitigated by the tax breaks that the self-builder can receive while building their property. In a self-build project, the majority of VAT for material and services is redeemable resulting in savings for the borrower. Stamp Duty, a burden for many first-time buyers looking to take their first step on to the property ladder, can also prove to be beneficial for the self-builder. Stamp Duty for the project is charged on the value of the land or property originally bought and not its subsequent value at the end of the project, resulting in huge savings for borrowers.
One factor that has meant brokers have shied away from adding self-build mortgages to their portfolios has been the perceived complexity of the product with stage payments being a key feature. There are a range of options for the self-builder whether they are building a home to live in or a property that they plan to sell once it is complete.
The mortgage can be secured on the property being built or on the plot of land with stage payments being made. The first payment will usually pay for the purchase of the building plot with stage payments being made when crucial elements are being added, such as the foundations being laid or the roof installed.
A part to play
Self-build certainly has its role to play in making housing ownership more affordable with buying the land and building costs usually significantly cheaper than an equivalent property already built and marketed. However, it is likely that it will still remain the domain of the experienced home owner.
There is unlikely to be a deluge of borrowers wishing to take out self-build mortgages. However, those lenders that operate in the market will continue to benefit from giving specialist advice to a key sector of the housing market. With the steady growth of the sector, more intermediaries are beginning to recognise the real benefits that the self-build sector can offer.
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