One way to beat a double housing dip – build your own

Self-build is rising in popularity thanks to a drop in land prices and the availability of mortgages.

(SCOTT BARBOUR / GETTY IMAGES)

Building your own home from scratch or taking on a major conversion is never going to appeal to everyone.

But mounting fears of a double dip in the housing market combined with falling land prices is creating a growing appetite.

According to BuildStore – a broker for all aspects of self-build and conversions – mortgage enquires in the first half of 2010 were up a significant 17 per cent on the first half of 2009.

Mortgage lenders are also starting to migrate back into this niche market. On 27 July, Leeds Building Society announced the launch of a new self-build mortgage deal, having been absent from the sector for the past 12 months.

To the uninitiated, self-build can appear daunting, but the process itself is engineered to keep risk to a minimum. The first thing you will need to do is find a plot of land, which these days can be carried out easily via websites such as PlotSearch.co.uk or Plotfinder.net.

Land prices have fallen by between 20 and 30 per cent since the pre-crunch days of 2007, with plots in some counties, such as Cumbria, starting at little more than £8,000, according to Jaclyn Thorburn at BuildStore. "There are also considerably more plots available now; we have about 7,000 for sale compared with an average of about 5,000 over the past decade. This is largely due to developers and individuals wanting to claw back some capital after the recession and a simple reduced demand."

Securing funding to buy the land and carry out the build or renovation is a little more difficult. There are only 18 lenders operating in the self-build arena, according to Moneysupermarket.com – almost all of them building societies. Some, such as the Cambridge and Cumberland, restrict lending to the local area. Self-builders are also typically restricted to borrowing a maximum of 75 per cent of the projected "end value" of the project, compared with 85 per cent or more before the credit crunch.

Once agreed, the funds are released in stages (typically five) against the increasing value of the project, and, in turn, in chunks of no more than 75 per cent of the value of each stage. Names of the five stages vary between lenders but typically refer to the land; foundations and walls; roof; plastering and fittings; and completion.

"Each tranche of funds is released following an inspection by a qualified surveyor or valuer and sent electronically," said Paul Kaye, the general manager at Leeds Building Society. "Consequently, borrowers receive the money quickly when required and they do not pay any interest until they have received the funds." Unlike when buying an existing property however, borrowers will have to stump up five valuation fees as opposed to one – £70 a pop at Leeds.

Most self-build lenders also pay out in arrears of each stage, not in advance. "Lending in arrears means we are not risking the money of either our savers or of the individual borrower," says Alison Rolls at Norwich & Peterborough Building Society, a lender that offers a self-build option across its entire mortgage range. "Typically, this approach should not present a problem as builders should require paying only when each stage is complete. Furthermore, it is not unheard of for building firms to go bust mid-job so if you have paid up front, you could end up in trouble."

But this does not solve the problem of raising money to buy the land in the first place. "Self-builders that borrow in arrears typically have capital stored in a house they are selling to raise the cash," says Ms Thorburn. "Alternatively, they may be existing property developers who already own the land or have inherited the plot."

The Accelerator mortgage, accessible only through BuildStore, is unique in that it will lend in advance of each stage. Loans to value (LTV) on this deal are also higher than the market average at 85 per cent of the final projected value. But, with a lifetime tracker mortgage priced at 6.4 per cent with a £999 fee, rates are not cheap.

Self-build providers that lend in arrears don't offer much better value. Leeds' new self-build deal, for example, is a two-year tracker currently priced at 6.19 per cent with a £999 arrangement fee. This compares to Yorkshire Building Society's 2.39 per cent standard two-tracker with the same fee and the same 75 per cent LTV.

Some lenders, such as single-branch Ecology Building Society, focus primarily on self-build, renovation and conversion projects, so offer a higher LTV of 85 per cent – but will impose other restrictions. "Applicants will need to show that the project offers a demonstrable and sustainable improvement to the built environment,' says the business development manager, Jon Lee.

While experience in property management is not mandatory, applicants will need to have done their homework in gaining planning permissions for the land, approvals from the local authority for change of use if the building is a conversion, as well as producing the architect's and structural engineer's reports.

You will also need to pay for site insurance which covers materials and equipment, public liability insurance in the event there is an accident on your land, and employers' liability insurance which protects builders carrying out the work. This insurance can then be switched to standard buildings and contents cover at the appropriate time.

The benefits of a successful self-build job, however, are great. According to BuildStore, building your own home is typically 30 per cent cheaper than buying an existing one – and if the plot costs less than £125,000, you can escape stamp duty.

Self-builders will also be able to reclaim VAT – payable at 20 per cent from January next year – on the costs of all goods and materials, provided the application is made within three months of completion.

But the process does not always run as expected, which is why a contingency sum is crucial, said Mr Lee. "Value doesn't always correlate with the money you have put in," he said. "For example, if you spent £15,000 early on in the process, the value of the structure may not increase by the same amount at the time but it could shoot up by considerably more than this at a later stage. We always recommend borrowers have some capital put aside."