Self-build has traditionally been associated with eco-homes, experimental architecture and a certain popular television programme. However, self-build properties do not necessarily have to be grand designs, and many brokers and clients alike may be unaware that this specialist niche in the property market has proved to be particularly resilient in the downturn.
In today’s market, many of you are diversifying your offering to cope with the challenges ahead. By offering self-build, with the support of an experienced and specialist mortgage lender, many brokers may not have to look beyond the mortgage market for diversification opportunities.
According to self-build specialist BuildStore, up to 20,000 people build their own homes each year – representing approximately 13% of all new houses built. The annual spend by self-builders on land and building costs is thought to be in the region of £6bn.
The current climate is proving to be a particularly fruitful time for prospective homeowners to build rather than buy. Recent statistics by BuildStore show that the number of self-build land and renovation opportunities grew by 50% in 2008. With over half of available self-build plots being priced at £150,000 or less, and a third of plots at £100,000 or less, it is now possible to self-build a detached family home for less than £200,000. This is an extremely attractive proposition for the right client, and brokers would do well to get in on the act.
Benefits of building
Increasingly, self-build is seen by brokers and clients as more cost effective than buying. Until recently, one of the biggest barriers to building has been the shortage of affordable land. However, the current economic conditions are encouraging many developers to sell off a proportion of their land banks, or at the very least to not compete for plots that become available. Similarly many farmers or owners of larger estates are selling part of their land as a way of subsidising their income.
In some areas, the value of land also appears to be depreciating more rapidly than the value of homes, meaning that it has become easier and cheaper for potential self-builders to pick up a bargain. Figures from BuildStore’s PlotSearch database show that prices have fallen around 15% – 20% in the last six months.
Many of your clients may be unaware of the tax benefits of building their own property. A self-builder is able to claim back VAT – currently at 15% – for most of the goods and materials bought for the build from a VAT registered supplier. Tax savings on Stamp Duty are similarly advantageous, as Stamp Duty is only paid on the cost of the land if it is valued at more than £175,000. The building work and the value of the finished property are exempt from Stamp Duty, which is a particularly attractive point for those embarking on a bigger build as homes over half a million pounds are normally subject to a 4% duty.
One of the most appealing elements to your client is the ability to design the property to their personal specifications. Clients can also reap the rewards of their cost savings if they choose to sell their house. Best of all, if all goes well, they end up with their ‘dream home.’ At a time when value for money is so important, building can be the ideal way for clients to get exactly what they are looking for, for less.
Brokers can play a key role in advising clients on this specialist niche of the mortgage market. A specialist mortgage lender can offer your client a self-build mortgage, in which money is generally released in stages as the build progresses, rather than as a single amount. Lenders will often lend money to purchase land, typically 75% of the purchase price or value, whichever is lowest. The remaining stages can be fixed or flexible, depending on the lender but usually there are five instalments, to correspond with the build stages, in advance or in arrears.
The type of mortgage will depend on your client’s circumstances – for an arrears stage payment mortgage, they would need sufficient money up-front for a deposit for land, as well as money to pay for the materials, labour and various planning processes at the initial stages of the build. If a client does not have sufficient savings, then they may decide to sell their current house to release equity before starting the project. If they do not want to go down that route, then an advance stage payment mortgage will be more appropriate.
During the build, your client can typically borrow 75% of the cost of the value of the house as the project progresses, depending on the chosen lender for an arrears stage payment self build mortgage, or up to 95% of the costs in stages, with an advance stage payment mortgage. The advance stage payment approach helps borrowers overcome the cash flow difficulties often associated with building.
Giving real consideration to self-build as an option for your clients and offering them a value-for-money alternative to the housing market can yield big rewards. Clients eventually get to own their ideal home for a fraction of the price, and importantly, you can get a healthy additional revenue stream and a satisfied customer. n
