Strict planning laws, expensive land and a lack of lending all impede the Government’s aim of growing the UK self-build sector from 100,000 to 200,000 over 10 years. But measures such as Help to Build MIG could soon ease this problem reports Mortgage Strategy on 10 July 2013.
In a fresh push last month MPs, lenders and policy makers set up an all party parliamentary group on self-build.
The idea is to raise awareness of the issue in parliament and create a forum for lawmakers to implement changes that could boost self-builders.
Conservative party chairman and cabinet minister Grant Shapps had a few wacky ideas during his two and a half year tenure as housing minister.
The MP for Welwyn Hatfield had a fondness for catchy headlines and firing off press releases with pithy soundbites.
Mortgage brokers will remember his fleeting push for mates mortgages that encouraged friends to club together to buy their first home.
The push came with little substance and faced ridicule in the industry as well as short shrift from lenders who pointed out the flimsy collaboration of friends was insufficient security for a 25 year loan worth hundreds of thousands of pounds.
However, Shapps does have some genuine achievements to his name whether it was scrapping home information packs or, more notably, his support for self-builders.
In July 2011 Shapps got the ball rolling on making life easier for people to build their own home by setting up a working group with industry and Government.
The project produced a number of recommendations which are slowly but surely becoming reality although progress has been limited in the past two years.
Lenders can de-risk a project and the potential is there to really stimulate the self-build market
In a fresh push last month MPs, lenders and policy makers set up an all party parliamentary group on self-build.
The idea is to raise awareness of the issue in parliament and create a forum for lawmakers to implement changes that could boost self-builders.
The launch was accompanied by a Lloyds Banking Group all party-parliamentary group report outlining the key problems facing the sector and the launch of a finance industry group to bring more lenders into the fold.
The report shows the UK is lagging behind the rest of Europe with just 12,000 self-build homes per year, accounting for just 7.6 per cent of the housing supply.
This compares unfavourably to Hungary which has 52 per cent, France on 38 per cent and the Netherlands with 10 per cent.
The Government’s stated aim is to double the output of self-build housing from 100,000 to 200,000 over the next decade.
The typical self-builder
The average self-build project, including land costs £255,543 and the self-build market is currently worth around £3.6bn per year.
The report shows that self-builders have higher incomes with higher housing wealth and that younger, lower income households are infrequent builders.
As well as being expensive it is also seen as risky for lenders and borrowers with fears that the time and costs could spiral out of control.
“Self-build is a pretty niche market and most people who do it have probably done it before,” says Your Mortgage Decisions director Dominik Lipnicki.
“They tend to be quite independent minded. It is complicated as you are taking on a building project and the lender will pay you out in chunks so when a bit is done they will pay you more.”
The people who do it he says tend to be builders or people with a lot of experience and with a decent deposit.
“For someone fresh to do it is very tough even though the Government would want more people to build their own home,” Lipnicki adds.
There are other major barriers to entry from strict planning laws to expensive land and a lack of mortgage lending.
Lloyds Banking Group mortgage director Stephen Noakes says the recent Government-led initiatives have been encouraging, but they need time to work and if the outcomes are to be successful then these activities need long-term support.
“If the sector is to grow and become part of the mainstream market then more work needs to be done in terms of sharing information and standardising practices,” he says.
“We need to see more coordination between both national and local government and the lending industry if we are to achieve this.”
Slow improvement on planning
The biggest obstacle to home building in the UK has long been incredibly strict planning laws that allow local people to veto developments easily and gives strong protection to green belts and the British countryside.
Last year the Government introduced the National Planning Policy Framework which aimed to simplify the system and allow more homes to be built.
Controversially it proposed a “presumption in favour of sustainable development” which faced heavy criticism from those opposed to developments.
The NPPF explicitly mentioned self-build for the first time and has allowed local authorities to encourage more building.
National Self-builders Association chairman Ted Stevens says the biggest single thing is the Government revamped the planning system 18 months ago.
“Buried in there, for the first time ever, there is a requirement for every council to measure the level of demand for people who want to build their own homes,” he says.
“If there is demand then they must make provision for that demand. It is already trickling through to councils across the country doing all kinds of different things to encourage self-build.”
Some councils are selling land to self-builders, some are working with housing associations to get community self-build projects away. Some are buying land they are making available to self-builders.
Stevens says the effect is significant with nearly 60 councils collectively building up to 3,000 more homes in the next 12 months.
He believes building will accelerate as more councils become involved and the changes in planning laws could soon be adding 10,000 extra homes a year. It is still a far cry of doubling self-build homes to 200,000 but it is a start.
Building Societies Association head of mortgage policy Paul Broadhead, who has worked closely with mutuals and Government to boost the sector, welcomes the planning revolution too.
“We have seen examples of local authorities giving certain plots preferential terms for self-build when providing planning permission,” he says.
“It is by no means uniform right across the country but it is starting to spread. The NPPF has simplified the policy hugely but it won’t cause major changes overnight.”
Lipnicki says self-build is much more popular on the continent because of looser planning rules and fewer regulations.
“Land is a lot cheaper whereas land is extremely expensive in the UK while planning rules are very complicated along with building regulations,” he says.
“It is where for anyone to do it unless they know what they are doing and they come from that industry.”
Mortgage deterrent
With planning slowly improving the next stop is the mortgage market which has proved tricky to stimulate.
Council of Mortgage Lenders’ figures show April was the best month since October 2008 which means niche areas could get a fairer crack of the whip in a rising market.
However, self-build mortgages are far more complicated and risky than a traditional mortgage and takes committed builders to see the job through to completion.
Do-it-yourself television shows where builders spend years and hundreds of thousands of pounds chasing their dream home have put many people off.
It has also deterred lenders offering mortgages to people looking to build their own home as they see it as a risky project to invest in.
If a lender has given money for the walls, then they have to make sure the walls have been built
It means there are few lenders offering loans and it remains a very niche area although more lenders have entered the sector in the last couple of years.
Funds are lent against both land and construction costs with an average LTV of just 75 per cent.
The money to buy land can be released to borrowers but construction loans are released in stages and heavily monitored by lenders.
Most lenders only release the funds after construction is complete on a particular section of the house such as the first floor. The rest of the money is then released stage by stage after each floor is built.
It means borrowers must stump up the cash and then claim back the loan from the lender once they approve of the part of the house you have built.
The result of this complicated process is that lenders stay away as it becomes incredibly difficult to have the right systems and staff unless you are very committed.
“I understand why some lenders don’t want to touch it as it’s complicated,” says Stevens. “It is not as simple as lending on a normal house when you can streamline the process and make it simple.
“For self-builders someone has to go out and check you have built the foundations. If a lender has given money for the walls then they have to make sure the walls have been built.
“It is a bit fiddly and for lenders without big volumes it is understandable why some say it is too awkward and it gets put in the too difficult box.”
But Stevens argues that a growing sector could create huge opportunities for lenders if they stay in the sector as it could be building nearly 20,000 homes in a few years.
Lenders letting down the self-build sector
The lack of mortgage lenders and lending in self-build is one of the biggest hurdles to growth and a key focus of the finance working group.
BM Solutions is responsible for about 25 per cent of all mortgage lending with mutuals making the vast majority of the rest.
Earlier this year Virgin Money pulled out of self-build in a major blow to the sector at a time when it is looking for more lenders.
Stevens says he was disappointed when Virgin withdrew but says the number of lenders has doubled and he still expects lending to double to more than £7bn by 2015.
Specialist self-build broker Buildstore managing director Raymond Connor is more downbeat on lenders and feels they are not helping people.
“We have engaged with a number of mutuals, but apart from that, lenders have let down the self-build sector quite badly,” he says.
“BM solutions is doing its bit but it’s not the most exciting products. We were particularly aggrieved by Virgin Money when it took its self-build mortgage away because it said there was no demand for it. Of course there was no demand for it when its products never really suited the sector in the first place.”
He argues that lenders need to become engaged and also criticises the Government for not doing enough to get them involved. But he also says the industry has been divided as to what’s needed and how they should approach lenders.
The APPG on self-build founder and Conservative MP Richard Bacon called on Government to remove bad lending rules.
“Self-build shouldn’t be the preserve of the most affluent,” he says.
“It needs to become a mainstream part of our housing supply to give people more influence, choice and satisfaction in the provision of their own homes.
“We need to make people more aware of the tremendous possibilities of self-build. Lenders have an important role in developing the products which will help the sector to grow. Government must make sure that bad rules don’t get in the way.”
Kit homes
One way to tackle some of the risks in a self-build project is the introduction of kit homes which would construct a home ready to be put in place rather than intensive lender checks.
In its APPG report last month Lloyds said it was looking into using kit homes as a way of encouraging other lenders.
“There is a spectrum of self-build projects,” says Stevens.
“Most people think of self-build as actually you putting the bricks on top of each other but the reality is different. Nine out of 10 self-builders hire builders.
“With TV programmes showing self-build going wrong the perception is that is is risky so lenders get concerned. The reality is that most self-builders use a builder and quite a lot use a ‘kit home’, which is put together in a factory for them and they are incredibly risk free. It can be like buying a kitchen from Ikea and be very simple.”
Broadhead says lenders can de-risk a building project for lenders and has the potential to really stimulate the market. The BSA says it will work with Lloyds to boost the use of kit homes.
Innovation
Bad rules could encourage more lenders but they can also stifle innovation at existing lenders.
It requires lender investment and commitment that they may feel more comfortable putting into their their existing systems.
There are also practical problems stopping lenders from reaching more volume as they deal with challenges coming from the mortgage market review next April.
“I would not expect to see a huge amount of product innovation over the next 18 months and it is purely down to IT resource being focussed on introducing the MMR in time,” says Broadhead.
“There has always been a nervousness for lenders to get involved in self-build so they need to understand the risks. They don’t fit into existing automated processes as it is very bespoke.
“To innovate you need to up-skill staff in how you underwrite mortgages and because of modern construction and kit homes staff need to understand their risks and value.”
The innovation self-builders really want is higher LTVs and payments up front instead of receiving the staged payment after construction.
Buildstore offers an accelerator product that will give people the money first but it has limited use and really needs more lenders to offer the service for it to become mainstream.
“The innovation self-builders would really like to see is the release of staged payments before the element of construction,” says Broadhead.
“If it happens with a wide number of lenders then it would work for those who can not access it at the moment because they don’t have sufficient cash flow. It would have a big impact.”
Connor says half of all inquiries they turn down could be solved by faster payments and higher LTVs.
“If you are living in a house and you want to buy a plot of land for £100,000 then you immediately need to find £25,000 and you are footing the building costs before the first payment,” he says.
“It is consumes more cash at the beginning than other forms of buying a house. It does not need to be like this if there was a widespread mortgage indemnity guarantee scheme, which is where the Government can come in.
“More than half of all inquires we currently get that we can’t help would be sorted through a mixture of the accelerator mortgage and higher loan to cost lending, which are both perfectly doable through a MIG.
“It would add several thousand more new homes a year. The guarantee is feasible but we need to bring some security for the public purse about the suitability of the project, which can easily be done at the outset.”
Help to Build
The Government is actively considering the major step of launching a Help to Build MIG scheme as part of the Help to Buy scheme set to launch in January 2014.
Connor believes the launch of a Government MIG would be a game changer to boost high loan to value mortgages and encourage more lending.
“The best thing the Government could do is introduce a Help to Build guarantee and it is being discussed,” he says.
“We need lenders to do more than simply vanilla mortgages and we need to bring them in to advanced staged payment mortgages and high loan to cost mortgages.
“People need to borrow 85 per cent or 90 per cent on the land and 95 per cent of the building costs. It is possible at the moment because there is a private self-build MIG available through Jubilee and more mutuals are starting to use it. To bring some scale into the market we need one of the main banks to come into the market.”
With the Government support coming in warm words, working groups and now looser planning rules perhaps now is the time to back the market with a MIG too.
If a MIG scheme comes into force combined with new planning rules it could be a catalyst for more brokers to get involved in the sector as demand increases.
“As a broker you do need to understand it,” says Stevens.
“If you asked people if they can ride a unicycle they would say no but if they practised for a month they probably could so it is about practice.
“You need to spend a bit of time understanding it and trying to do it as you can’t be a jack of all trades and you need to have good knowledge. It’s a learning curve but the opportunities could be huge.”
