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Building strength

It is well known that we are building too few houses to meet our needs. The causes of this failure are many.

Demographic changes have resulted in the need for housing to reflect the in-creased number of single parent families while house builders will always blame the planning system for the lack of houses being built. Many also believe that land development is being held back by builders to keep house prices artificially high.

There is some truth in all these assertions but the overriding problem remains – we are simply not building enough houses to meet demand.

So, with this nationwide housing shortage becoming more acute it is no wonder that many ordinary families are taking matters into their own hands and becoming house developers.

Self-build, renovation and conversion is now a big business and many believe the sector is destined to mirror the markets of Continental Europe, Canada, the US and Australia. To allow this sector to grow we must provide a support infrastructure to enable people to see their projects through.

An estimated 30,000 individual building plots are sold each year, acc-ording to BuildStore Plotsearch, with an increasing number being sold to individuals for their own use rather than to small builders who will build to sell on. Indeed, it is estimated that around two-thirds of all individual plots are being bought by ordinary families with a view to building their dream homes.

During the past five years the supply of individual plots has remained steady, with no sign of the growth required to substantially expand the sector. But what has been evident is the proliferation of multiple plot sites being developed for or by the self-build community. Some land developers are remaining just that – developers of serviced plots rather than house builders.

There is a growing realisation among developers in the private sector (and to a certain extent in the public sector) that land designated for self-build is a viable and desirable option.

With the potential for this market to account for a quarter or even a third of new housing supply, the sector should become attractive to the mortgage industry which will need to adapt to meet its needs.

And those needs are much wider than those of a house buyer or remortgager, as an individual developing their own home is looking for much more than just an attractive rate and low charges. Self-build is therefore an area in which knowledge and advice from brokers is paramount.

Building a home involves a series of financial transactions over a period of up to two years. There is land to buy, professionals and contractors to pay, equipment to hire and materials to purchase.

The self-builder acts as the developer and funds the build while at the same time they and their family need somewhere to live. The favoured option is to remain in their current home while they are building their new one but sometimes they move into temporary accommodation during the build.

The self-builder is therefore in the situation of funding the build of the new house while paying either a mortgage on their existing home or renting temporary accommodation, along with all the usual living costs.

This means self-builders need positive cash flow during their projects but traditional self-build mortgages do not provide this facility. Lenders with traditional self-build mortgages want to ensure that they have security for the money they lend and so on a self-build project they lend money in stages as the build progresses.

A lender will also look to protect itself by usually lending a lower percentage on a self-build house during construction than they would on a completed house. Typically they will lend 75% to buy a plot and then 75% of the value at each stage but only once the stage has been completed and valued.

In this case, a self-builder needs to inject a significant amount of cash into their project throughout. They are required to fund 25% of the cost of the land and then the full amount of each stage during construction, only getting 75% of the costs of that stage back once it has been completed.

The result is that while many self-builders can afford the mortgage on their new house once it is built they do not have the financial resources req-uired to get them through the development phase.

Cash flow is the most important aspect of a project to get right. Getting this aspect right makes a project run more smoothly, gets the work completed more quickly and saves the client money.

So how do you achieve this? BuildStore has worked with a number of lenders to develop a different style of self-build mortgage which addresses the areas which restrict cash flow on traditional deals. The lenders offering these mortgages via BuildLoan understand that self-builders make excellent borrowers. They have good incomes and will ultimately have significant equity in their homes but during the build period they will go through a period of financial strain.

These lenders are prepared to lend in a way that improves a self-builder’s cash flow significantly and they do this in two ways. First, rather than lending only 75% of the cost of land and build they are prepared to lend up to 95% of both the land cost and the build costs meaning that the cash injection re-quired by the self-build comes down from 25% to 5%.

Second, and more importantly for cash flow during a project, they will lend the money at the start of the stage rather than the once the stage has been completed.

They also release money on receipt of professional certification to say that each stage has been completed rather than waiting for a valuer to visit the site and report back. This makes a huge difference to clients and puts them in the position of having a positive cash flow during their projects.

This positive cash flow saves self-builders money as it makes them into cash buyers of labour and materials. It also ensures contractors do not leave the site and start another job while awaiting payment as they can be paid on time, and it saves on mortgage payments on borrowers’ existing homes which should sell more quickly as the self-build has taken less time.

The additional cash flow with these new mortgages also means that a lender is releasing funds before the value has emerged onsite, so an indemnity is set up which is paid for by the borrower to give the lender protection for the amount of cash advanced over the amount they would usually ad-vance to a self-build borrower.

While these advance stage payment self-build mortgages address the issues of cash flow, the positive cash flow produced depends on the costings prepared by the borrower at the start of the project. It is important to ensure that accurate costs are calculated and app- ropriate contingencies included when the loan is set up.

BuildStore adds value to the self-build mortgage process in a number of ways. In addition to having the ex-clusive advance stage payment scheme, the company also stays in contact with borrowers during the build, which can take up to two years, ensuring that money is released as quickly as possible for each stage and giving the borrower help and information to ensure their project runs smoothly.

The company is also working on calculators for its BuildLoan website to allow brokers to show the cash flow differences bet-ween advance and arrears stage payment mortgages, and where the self-builder does not have project costings, help them make estimates for each stage, depending on what they are building and where.

The panel of lenders that operate advance stage payment mortgages via the BuildLoan scheme cover a wide range of borrower types and also a variety of construction types.

Self-cert is catered for by The Mortgage Business and Amber Home Loans while Accord Mortgages offers an offset account, and Skipton and Lloyds TSB Scotland are full status lenders.

Raymond Connor is chief executive of BuildStore

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