Self-build: Can you still find a mortgage to build?
Tuesday, 20 October 2009 11:46
As fewer houses make it onto the market, the chances of finding that dream home look slim - so why not build one yourself?
Sarah Routledge asks if there is still any finance available to those brave enough to build their own home.
Finance after the crunch
Calum Kerr, head of self build at independent mortgage broker Savills Private Finance, says: "Before the credit crunch hit, those lenders interested in funding self build tended to be regional building societies - at one stage there were 39 providers, as well as three main high-street banks.
"But given the bank and building society mergers over the past few years, many of these lenders no longer offer self-build finance.
"Falling property and land values have also caused problems as the majority of lenders released money in stages during construction based on valuation at that time; falling values during the last 18 months mean many schemes have found themselves in negative equity on a partially-built property.
"Despite this, there are lenders willing to support the funding requirements of self-build projects. But specialist advice should be sought to ensure that the clients' needs are fully assessed, particularly their cashflow requirements."
"Quite a few lenders used to self-build and now don't - like Britannia," adds John Hay, head of financial services, marketing and product development for Buildstore.
"But we've partnered with five building societies who are lending through us. So there is finance out there, but it is going to be through specialists."
Demand for self-build is still there, despite all the uncertainties in the housing market, Mr Hay adds.
"Enquiry levels have gone up by 30 per cent in the last year, and that is partly because we have more of the market, but also because land has become more available and has come down in price by 20 per cent."
Mr Kerr agrees. "The advantage of getting into self build now is that land costs have fallen, along with the cost of materials and labour."
However, the self-build market has changed in the same way as the mainstream mortgage market - deposits need to be bigger "at least 15 per cent," says Mr Hay - and those seeking self-cert mortgages are going to struggle.
The main difference to the self-build mortgage market since the housing crash is that banks are now lending on a variable rate until the build is finished, when the borrower can generally change to a fixed rate, rather than start off on a fixed rate.
But given that interest rates are set to remain low for the time being, this is unlikely to be a problem for the short term.
Cashflow
If you are embarking on a self-build, Mr Hay advises getting your finances in order before starting, as it may be difficult to get credit halfway through the project if you run out.
"It's worthwhile going into a self-build project with more contingency," he advises.
"You need to go in knowing what it is going to cost and have the money available."
The most important financial aspect for a self-builder is cashflow, Mr Hay adds.
Typically self-build mortgages differ from conventional mortgages in that the money is released in stages, and there are two basic types of self-build mortgage available - advance and arrears. While the advance mortgage releases the cash for each stage in advance, the cheaper arrears mortgage pays out after the end of each stage.
Releasing cash in advance of each stage is more of a risk to the lender, which is why this is cheaper, but this is only a realistic option if you have enough cash to cover the build until the money arrives.
In addition, the lender will send a valuer out at each stage before releasing more money from an arrears mortgage, leading to potential delays and even a refusal to lend any more cash if the lender is unhappy with the way the build is going.
Buildstore takes the advance approach with its Accelerator range of mortgages from several lenders - Saffron Building Society, Ipswich Building Society, Melton Mowbray Building Society recently joined Skipton Building Society, the Hanley Economic Building Society and BM Solutions.
However, the firm says it can also find an arrears-type mortgage for its customers if that is the better option.
Mr Kerr, who has built his current home, says it is worth contacting a broker with experience in this area to find out which type of mortgage is best.
"Specialist advice should be sought to ensure that the clients's needs are fully assessed, particularly their cashflow requirements," he says.
Finding a plot
If you can get financing, the next hurdle is locating a plot of land and planning permission to build a house.
There are several online databases listing plots of land for sale across the UK, many with partial or detailed planning permission to build a house. Buildstore operates its own, PlotSearch, and you can also try Land Directory or use estate agents such as Vantage Land
However, be cautious if the plot you are hoping to buy does not have some planning permission already.
The Financial Services Authority (FSA) is warning land investors to avoid landbanking schemes, often marketed by companies who offer to handle the planning permission process.
Once the planning permission is gained, the land is worth substantially more, these firms promise - but the FSA does not regulate land as a specified investment and often the land is in a Greenbelt zone where development is not permitted.
If you are unsure about a company, contact an independent financial adviser or legal adviser to find out what you could be buying.
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