Colin Field, CEO of Saffron Building Society, takes a closer look at the intricacies of self-build mortgage lending and why lenders and brokers should be involved
Last year we saw an increase in the number of self-build enquiries at Saffron Building Society.
For all of us in the industry, I believe this is going to be a growing segment over the coming years but the application process can be difficult if you aren’t prepared.
I wanted to share some of our experience to help brokers manage it more efficiently to unlock this growing opportunity.
Why is self-build booming?
An Ipsos MORI poll suggested that one in seven Britons expect to consider building their own home, which equates to around seven million people.
The 2017 Home Owners Survey reported that the quality of housing was also a contributory factor. 57% of adults considered it to be a problem, up from 52% the year before.
In addition, new builds are not popular, with almost twice as many people preferring an older home (49%) to a new build (19%). Obviously, it would be wrong to categorise all new builds in this way but it’s possible to see the trends.
The rise of new entrants
In financial services, we’re all accustomed to hearing about new fintech companies shaking up the market.
The construction industry is experiencing a similar revolution.
In May 2018, City AM reported on a company which is developing a new technique to solve construction problems. The founders believe that three problems need to be addressed in the current UK housing market – affordability, sustainability and quality.
Anyone able to overcome all three will be well positioned to thrive.
The company manufactures parts off site, then delivers and assembles them in a location of the buyer’s choosing.
The entrepreneurs believe this is the first time that modular housing has been supplied to a higher standard than the average new build, but at a lower price. This is achieved through the use of new materials, specifically ‘cross-laminated timber’ or CLT.
CLT is increasingly being used in the UK housing sector for its low environmental impact and versatility. And it’s particularly useful for modular or custom housing because it’s easy to modify.
If you are unfamiliar with the intricacies and nuances of self-build, then it could pay to invest some time to learn more about it.
At Saffron Building Society our underwriters have years of experience assessing complex applications, so they see the common problems and errors in self and custom-build applications. Here are some of the most common problems:
• Planning consent – all applications must be accompanied by full planning consent. If consent is unavailable, it will be impossible to proceed with the application. Planning consent can take approximately 12 weeks, sometimes longer depending on the type of construction. Without it, a mortgage valuer can’t assess the value of the property so it is one of the essential aspects of the application.
• Build costs – In some instances it is clear that applicants have not fully considered the costs of the build, and detailed costings are always required when applying for a mortgage. A lack of detail about costs will set the alarm bells ringing. A fixed price contract with the builders always provides more certainty, and without one more information will be required.
• Affordability – a common but surprising mistake is that people forget they will need somewhere to live while their house is being built. Rental costs affect affordability and have to be included. Additionally, people need a contingency plan with savings to fall back on in the event of unexpected events. No matter how well a project is estimated, there may be unknown costs that crop up along the way.
• Warranties – a warranty provides the guarantee that future problems will be fixed by those responsible for the build. However, construction warranties come in many different shapes and sizes. Before submitting an application it’s important to check the warranty the applicant has in place and make sure that it’s acceptable to the mortgage provider who will usually have a list of acceptable warranties. It’s also important to be aware that people are increasingly using architect’s certificates, but this is a little riskier and will need further investigation by the mortgage provider.
• Stage payments – can often cause applicants a problem as they find it difficult to provide a definitive time they want the money. We try to work as flexibly as possible with borrowers as we have experience dealing with the many different variables which occur during a house build. However, to ensure a swift response, we need to understand the applicant’s needs in respect of how they require to draw down the stage payments.
2019 and beyond
There is a growing body of traction to suggest that self and custom-built homes will assume an increasing proportion of the mortgage market.
Specialism and expertise in this area will mean you can be active and gain experience in a growing segment of the market.
Source: Mortgage Finance Gazette