You can make it

The self-build market now accounts for one in four detached properties built in the UK – more than are being built by any housebuilding company. Some 20,000 self-builds and renovations are completed each year. In comparison Persimmon built just 12,051 in 2001, Wimpey built 11,537 and Barratt built 5,498.

The vast majority of self-build properties are detached so they make up a small overall percentage of total new housing at one in eight of all properties. The average self-build project costs £147,000 and 15% cost more than £225,000 based on figures from self-build specialist BuildStore.

John Hay, director of product development at BuildStore, says several factors have combined to raise the profile of self-build, notably TV makeover programmes such as Grand Designs. “The market is busy and buoyant,” he says. “Self-build is now seen as a reasonable alternative to mainstream housing.

“You can get more help from project managers and co-ordinators, and finding land is far easier through online database the National Building Plot Register, which offers information on thousands of plots across the country.”

Rising house prices have encouraged more people to go it alone. “On completion the typical self-build is worth between 25% and 30% more than it cost,” adds Hay. “Homeowners also end up with a better quality property than if they had gone to a builder who will always build to a budget.”

BuildStore, which launched as the Self-build Advisory Service in 1997 and adopted its current name in 2000, has also fuelled growth, providing building materials at trade prices, information on plots, and more flexible finance than was previously available.

Traditional self-build mortgages lend money in arrears, typically on completion of each of five building stages: land purchase, laying of foundations, roofing, plastering and completion. The problem is that selfbuilders need capital to get started and many have to sell their homes to raise funds and live in a caravan until completion. BuildStore has made the process easier by offering stage payments in advance instead of in arrears. It also offers bridging loans.

Amber Homeloans, Britannia, Newcastle, The Mortgage Business, Skipton and Lloyds TSB offer the Buildloan self-build accelerator mortgage including fixed capped, discounted and variable rates. Amber was the most recent addition, joining in September. The Ecology also offers its mortgages but only to people renovating derelict properties.

“Our panel will lend up to 95% of the cost or value of the land, whichever is lower, and 95% of the cost of the build, with the money released at the start of each building stage,” says Hay. “Customers can borrow a high percentage of the overall cost in advance and maintain a positive cash flow.”

Lenders cover their risk by charging customers a valuation guarantee fee in return for receiving advance payments. The average BuildStore mortgage is £105,000 and eight out of 10 self-builders have a LTV at completion of less than 75%.

Norwich & Peterborough offers the traditional arrears stage mortgage through BuildStore but it does lend up to 95% of the plot or building compared with 85% on its standard products.

The BuildStore panel also lends for self-certification clients. “A lot of self-builders are self-employed, although not always in the building trade. We get IT professionals, accountants and financial advisers,” says Hay. “They are often independent and go-getting, and may have flexible employment that allows them to supervise work.”

Self-build usually takes up to two years from completing the initial application to finally moving in. Brokers have a key role to play, helping clients cost the project, put building work out to tender, arrange site insurance, prepare contingency funds to cover work that runs over budget, and warning of any pitfalls.

Novice self-builders sometimes think in two stages – buying the land and building on it. But mortgage lenders mostly won&#39t lend just to buy land – they lend on the entire project which means self-builders have to get everything costed before applying for a loan. They must know what the land will cost and what they are likely to spend on foundations, the building itself and professional fees.

Gavin Tank, an IFA at West London Associates, says valuations are a recurring problem with self-build. “Valuers are nervous and tend to undervalue just as they do with normal properties, but the problem is magnified because they are trying to work out the future value of a property that hasn&#39t been built or refurbished yet,” he says.

Self-build is rare in London but when it does crop up Tank uses BuildStore mortgages, usually for private landlords and developers buying dilapidated properties for refurbishment.

“I see myself as a facilitator first and a broker second,” he adds. “I take the project out of the client&#39s hands and manage it for them dealing with surveyors, solicitors, architects and accountants. I have to make things happen because I don&#39t get paid until things are sorted out. Self-build is hands-on and time-consuming stuff but ultimately rewarding.”

The financial rewards are nothing spectacular. Tank typically charges between 0.75% and 1% of the loan size for self-build compared with around 0.5% for a residential mortgage. He now insists on payment once the mortgage offer has been confirmed because waiting until completion too often meant the project fell through and he didn&#39t get paid. “Self-build is a lot of work for the money. You have to keep pushing things along often making four or five phone calls every day, although clients don&#39t always see this.”

Ruth Whitehead, principal of London-based Ruth Whitehead Associates, is keen to do more self-build but the shortage of plots in south-east England limits her opportunities.

“Ideally brokers shouldn&#39t just arrange the finance, they should be helping the client through the whole transaction,” she says. “This is a specialist area so you can&#39t take it on lightly but I enjoy the challenge.”

Brokers shouldn&#39t face any major problems moving into this market. “We are trained researchers and if we don&#39t know the answer ourselves we go out and find it,” adds Whitehead. “The process is the same with self-build.”

Be warned, it can be highly stressful. “But the job satisfaction is greater, you are helping somebody build their dream property,” she adds. “It is incredibly rewarding and I love it.”

Harry Fordyce, a mortgage broker in Elgin, Moray which is between Aberdeen and Inverness, says clients fall into two categories – those who want to do all the work themselves and those who prefer to delegate.

“Some people get carried away and start planning five-bedroom properties, and you have to nudge them into being realistic,” he says. “Others think you can build a house on the cheap but there are no shortcuts. You need to talk to local valuers and get a flavour of what the property would be worth when completed. You must also prepare clients for budgets running over.”

Fordyce says more work is involved and he charges higher broking fees but once the mortgage application has been approved and the first tranche of money has gone to the solicitor he can take a back seat.

“We used to arrange funding through local banks but branches have lost their autonomy following centralisation and are no longer so helpful. BuildStore is a great help, geared up to take brokers and clients through the whole process.”

The Buildloan valuation guarantee has cost Fordyce&#39s clients anything between £269 and £1,900. Where they don&#39t need advance stage payments he can often secure a better deal elsewhere. “If they have a lot of capital, or have bought the land and only need to borrow, say, £50,000 to finish the project, I go to a traditional arrears-stage lender such as Leeds & Holbeck instead. There are around 30 lenders that will look at self-build.”

Norrie Henderson, head of self-build mortgages at BuildStore panel member Lloyd&#39s TSB Scotland, says 30% of all new properties in Scotland will be self-build by 2004, mainly due to dissatisfaction at the quality of new-build properties. The market is currently worth £500m.

She says lenders are looking for commitment from potential borrowers and the drive to see the project through. “Once we have their plans, including the architect&#39s outline drawings, we send them to a surveyor for valuation. We need to know if the proposed property will realise the value of the mortgage and if the costings are accurate. If both of these criteria are met, along with standard requirements like affordability, we give the go-ahead.”

Securing planning permission and a building warrant from the local council can take a further eight weeks. All costs can be taken out of the mortgage including architect&#39s fees incurred before approval.

Self-builders should only employ reputable tradespeople, check exactly what work is covered by subcontractors&#39 quotes, use materials that meet recognised building standards, prepare contingency funds for extras such as a luxury kitchen and bathroom fittings, and check building work isn&#39t likely to spark disputes with neighbours.

Self-build has a long tradition in Northern Ireland. Drew Folland, principal at brokers Drew Folland Financial Management in Derry, says families in rural areas traditionally give an acre or two of their land for children to build a house on.

“We are based just a few miles from the border and many clients are now buying in southern Ireland where land is more available,” he says.

Folland arranges finance primarily through local banks First Trust, Bank of Ireland, Northern Bank and Ulster Bank. “They typically lend stage payments in arrears but this is less of a problem locally where people often don&#39t need money to buy the land because it has been given to them by their family,” he adds.

Mark Bergin, sales and marketing director at BuildStore panel member TMB, says BuildStore has made it much easier for people to enter the arena, helping them get materials at trade rates and without paying VAT.

“TMB only deals with intermediaries but BuildStore acts as a master broker selling our product direct to the public,” he adds.

Despite the market&#39s growing profile, other Buildloan lenders see richer pickings elsewhere. David Ginivan, spokesman for Britannia, says it remains a small niche. “Self-build isn&#39t our prime focus at the moment, it&#39s not something we are putting a lot of drive into,” he says. “The remortgage market is much busier and we are focussed on that with many products high in the best buy tables.”

Among Buildloan accelerator lenders, Skipton currently offers a three-year fixed-rate at 5.09% and a five-year fix at 5.19% with no overhanging redemption penalties. It also offers a four-year tracker charging 0.49% above base rate with no redemption penalties at any time.

Lloyds TSB Scotland offers a five-year tracker charging 4% during the build plus the choice of a 4.79% two-year fixed-rate after the build or a five-year fixed-rate of 5.29%.

Flexible mortgages are also available. Newcastle offers its offset mortgage for loans up to 85%, charging base rate less 0.1% for the first six months, then base rate plus 0.5% for the remainder of the term.

TMB offers a self-cert deal up to 85% final LTV with a variable rate of 4.99% during the build and a 2% redemption penalty for the first three years.

Leeds & Holbeck has offered its own range of arrears stage self-build mortgages for more than four years. Self-builders can use any of its standard mortgage range, says spokesman Daniel Jones. “We release the money in five stages after the work on each has been completed. If we paid upfront borrowers might spend all their money at once. This helps them keep control of costs and also protects us, as we are only lending on finished work.”

Self-builders can secure Leeds & Holbeck rates such as a five-year fixed at 4.99% or a tracker deal, charging base rate plus 0.24% up to 90% LTV or plus 0.74% up to 95% LTV, until December 1 2006.

Leeds & Holbeck has seen a steady increase in self-build business. “Rising property prices mean it is cheaper to build than to buy,” says Jones. “A two-bedroom flat in Leeds will cost £100,000 but you could build a four-bedroom detached for the same money.”

Forthcoming regulatory changes will have a different impact on self-build mortgages as compared with standard loans, BuildStore&#39s Hay says, although the key facts illustration will be used for both. With a standard deal the KFI will show the monthly payment at the start of the mortgage and what the borrower will pay when any initial deal has expired. Payments will be based on the full amount of the mortgage. With a self-build mortgage, monthly payments will increase during the build as more money is drawn down. The schedule of these drawings won&#39t be known at time of application so cannot be incorporated into the KFI.

“The FSA will allow for supplementary information to be given, showing the impact of the ongoing stage payments, says Hay. “Where this information is supplied, it must be clearly marked that this isn&#39t a KFI.”

Self-build offers opportunities for brokers looking for a new, if testing, challenge. The future is out there. Go build.