Many intermediaries have avoided self-build mortgages for two reasons. First, they were seen as a bit of a hassle. Second, the products were not very client-friendly. But recent have brought changes.
The self-build and renovation market in the UK has grown rapidly in recent years, with about 20,000 people each year building or renovating their own homes.
Translating these numbers into mortgage lending makes the market for self-build mortgages total about £2bn a year, with the average self-build mortgage via intermediaries being £125,000.
Self-build mortgages are different from standard house purchase mortgages, at least until the house is built. With a self-build mortgage, money is released in stages as the building progresses but it is important to realise that not all selfbuild mortgages are the same.
There are basically two types of self-build mortgage – the arrears payment mortgage and the advance payment mortgage. With the arrears payment mortgage, money is released at the end of each stage of the build after the work has been completed and an interim valuation carried out. These interim valuations cost from £35-£50 and up to five valuations are carried out during the build.
An arrears stage payment mortgage protects the lender because the company is not releasing money until there is sufficient value in the building to support the borrowing so that in the case of repossessions, the lender can get its money back.
Typically, lending will be 75-95 per cent of the cost of the build and some lenders will lend in advance so the borrower can buy the land for the house.
It is not difficult to see that the client can suffer from cashflow problems as they have to complete and pay for large parts of the build before getting money from the lender. As a result, many self-builders with these mortgages sell their current house to release equity and move into rented accommodation or a caravan on site.
A more modern approach to self-build mortgages is the advance payment mortgage. Here, the cost of the build and land is worked out and split into the various stages but rather than waiting until the work has been completed, the money – up to 95 per cent of the cost of land and build – is released at the start of each stage, giving the builder positive cashflow and making the build process easier and quicker. This way, they have money to pay for labour and materials and there is no need for interim valuations as lending is based on cost and not value.
Obviously, the lender needs to ensure that their money is protected, so advance payment mortgages include a short-term valuation guarantee policy to protect the lender for the amount of money they have lent above their normal lending criteria.
The cost of this is not significant and when you take into account the saving of about £250 in the interim valuations which are not needed for an advance payment mortgage, the client is paying very little for the benefit of cashflow to cover their project.
Some lenders will run the self-build mortgage alongside the client's own mortgage during the build, allowing the client to stay in their own home while building their new home. This is possible with both advance and some arrears stage payment mortgages but the high lending percentages and positive cashflow provided by the advance payment mortgage make staying in the lender's own home more achievable.
Lending criteria for a selfbuild mortgage will normally follow the lender's standard terms and it is now possible to have a self-build mortgage on a self-cert basis as well as the option to take a payment holiday during the building of the new house.
There is no doubt that self-build is a niche market but a high proportion of intermediaries do get enquiries a few times a year. The adviser is drawn between wanting to provide good service to their client but also looking to avoid the potential hassle and time which the self-build mortgage can involve.
Unfortunately for the intermediary, self-build mortgages require much more client contact than standard mortgages. You need to explain how the mortgage works, help the client work out what their project is going to cost and how that breaks down between the different stages and ensure that each of the stage releases is handled properly and the money is released on time.
The cost-effective solution for the intermediary, and possibly the best one for the client, is for the intermediary to place the mortgage with a company which is experienced in the self-build market and which can handle their clients' queries and hand-hold them through the process.
This facility is available from BuildLoan (www.buildloan.co.uk) either direct or via many of the leading mortgage clubs and packagers.
The service is staffed by experts in land finding, the building process and in buying materials.
The result is a significant improvement in the service that an intermediary can give to clients while the intermediary has a cost-effective solution to dealing with these complex cases.
Self-build is growing in popularity and is going to keep growing but, for intermediaries, it is always going to be a niche market. The trick is to find a way of dealing with these niche clients in a way that makes the business cost-effective.