Self-build is booming and now accounts for around 25% of all new detached houses. It is a market on which many intermediaries are now focusing because it provides good quality clients and there is a greater availability of dedicated self-build finance and support available for both the intermediary and the self-builder.
However, as with any large building project there is a need for specific insurance products and mortgage intermediaries who are new to this market may be less aware of the insurances needed by a self-builder both during their project and to protect the build once completed.
In addition, even those who have placed these mortgages before may be unaware that the Council of Mortgage Lenders (CML) has recently announced changes on the need for warranties to be in place on new builds before mortgage funds are released, a move that has caused some uncertainty over what the position is on self-build.
The changes proposed by the CML will have a major impact on the structural warranty market and will introduce an alternative to a structural warranty for self-build. The CML identified that changes needed to be made to the way in which warranties are taken out because of problems with new homes and releasing funds.
It was often the case with new build homes that the sale of the property had reached legal completion and the new owners had moved in before the home had been classified as satisfactorily complete. This meant that the lender was lending on a house which may not have been properly completed and the borrower could therefore have difficulty in getting any outstanding work done because the builder would have already been paid for the property. To resolve this issue the CML has said that from April 2003 a lender will not release the mortgage funds for a new property until the buyer’s conveyancer has received confirmation, in the form of a cover note, that the property has received a satisfactory final inspection, and that a full new home warranty is in place.
While this applies to new build properties, self-build has been specifically excluded. The reason for this is twofold. First, self-build mortgages are different to normal house purchase mortgages in that money is lent to purchase the land and then at specific stages during the build; therefore the lender is agreeing to lend money well before the property could receive a final inspection. Second, many self-builders use professionals such as architects and architectural technologists to certify their build and, rather than take out a warranty, they rely on the protection provided by the architect’s professional indemnity (PI) insurance.
Traditionally there have been two ways in which a self-build is monitored during construction and protected afterwards.
The first is by way of a structural warranty taken out with organisations such as the National House-Building Council (NHBC) and Zurich Municipal. These companies will inspect the build at various set stages including:
• Excavation of site
• Substructure completed
• Ground floor preparation
• Walls to first floor level
• Walls from first floor to wall plate
• Roof framing and masonry complete
• First fix complete
• Completion and drain test
At end of the build their warranty usually protects the owner for a period of ten years against major defects caused as a result of the construction. This would usually cover:
• Major damage to the structure
• Faulty or deficient weatherproofing or waterproofing of the structure
• Threat of imminent collapse of the structure
• A breach of statutory building regulations, which results in a danger to physical health and safety caused by a defect in the work involved in the building of the house.
As previously mentioned, the second way of monitoring and protecting self-build involves using a professional such as an architect, surveyor or architectural technologist to certify the build during construction and post-build relying on their PI insurance should anything go wrong with the project. This is not the safest option to provide the best protection for the project. While there is nothing to stop the self-builder going down this route, they need to be aware that the cover afforded by the PI insurance is very limited. It is not a prime policy (which would respond to correct things covered under the policy right away) as it only covers problems arising with the house as a result of negligence being proven against the professional involved.
It is also important to be aware that, generally, any benefit that the self-builder may have under the PI insurance cover of the professional involved is not transferable to new owners of the house unless otherwise agreed by the professional whereas a structural warranty can be transferred easily on sale.
A high proportion of self-builders take the second route although the cover provided is less than that of a structural warranty. The main reason for this is that the cost of the stage inspections is included in the price of the structural warranty. Hence, self-builders who opted for a structural warranty and who were using professionals to certify their build were, in essence, paying twice for site inspections.
This gap was recognised by BuildStore and it has recently launched the BuildCare structural warranty, designed specifically for self-builders using professionals to certify their build. The warranty does not require any additional inspections be completed by the professional during the build, outside of their normal practice making it lower cost than other structural warranties.
A typical structural warranty lasts for ten years (but can be extended to 15) and comes into effect as soon as the new home is completed. The cover includes the structural warranty and in addition incorporates a ten year policy covering ‘clean up’ and legal costs in the event of pollution being discovered on the site after land purchase has been completed. It also includes two years’ legal expenses cover enabling the self-builder to pursue disputes arising directly from the construction of the home and to look after the quality requirements for the two years following completion.
Nevertheless, while a structural warranty is an important protection to have in place for the self-builder, it does not cover them for accidents and thefts during the build process. A building site is a dangerous place and it is important that the proper health and safety requirements are met. But accidents do happen and because the site is usually deserted at night, materials and equipment can disappear (if not properly secured). It is therefore important that the self-builder takes out adequate site insurance for their project. This will usually provide the following cover:
l Public liability ‘ This provides protection against claims in respect of damage or injury to members of the public (injury to trespassers or site visitors or damage to neighbouring underground services, for example).
l Employer’s liability ‘ This provides protection against injury claims from sub-contractors. The self-builder often assumes the position of being an employer, even if the labour being used is self employed.
• Contract works ‘ This protects the building materials on site and building in course of construction.
In addition the following cover is usually included:
• Own and hired in plant
• Residential caravan on site
• Legal expenses
Site insurance policies usually last for a fixed two year period but stop on the completion of the build. Some policies have been designed to give the client the full value of their premium by converting to buildings cover at no extra cost for the balance of the two year term if the build is completed within two years.
In addition to the structural warranty and site insurance, self-builder’s personal cover is also very important. There is a risk of accidents on site and even a minor one could result in the self-builder being unable to work for a period of time, both in their normal day job and on site. There is, therefore, a requirement for cover such as permanent health insurance or personal accident cover, as well as life cover and critical illness cover in case of a more serious accident.
Self-building is going from strength to strength and its reputation needs to be protected. If self-build is to continue to expand, borrowers need to be informed of changes that will affect them and take out policies to protect themselves accordingly, regardless of whether it is compulsory.
Self-builders do not need a final inspection and home warranty in order to obtain funds.
Relying on professional indemnity cover alone is riskier than taking out a structural warranty.
Borrowers should ensure thay have site and personal cover in case of accidents.