Tag: finance

HPH358: Getting the right mortgage for a house build project – with Tom McSherry
Tom McSherry from BuildStore explains the importance of cashflow when it comes to building a house and why a big part of selecting the right mortgage product is about planning your project around your budget and making sure you have accurate costings.

Interview with Tom McSherry

Tom McSherry is the National Business Development Manager at BuildStore with over 30 years of experience in financial services, 19 of which have been exclusively at BuildStore. With a background in engineering and a passion for construction, he has also successfully managed the development of his own family home, emphasising the importance of professional involvement in the design and construction process.

Engage early and start with a clear budget

No matter what your financial circumstances are, you will get the maximum benefit by engaging early with a mortgage provider and planning your house build around your budget. For some, the incubation period may be three or four years, and BuildStore has a specific team that will support early engagers.

Tom says that setting a clear and realistic budget is essential. Architects, designers and package solution providers should then work within these parameters, reducing the risk of a Grand Designs style ‘disaster’.

Remember the 3 ‘C’s – construction, cost and cashflow

While determining how much money you should borrow is a key stage, cashflow is the most important aspect of your finances once the build is underway. This ensures timely payments to contractors and the smooth progression of the build. Of course, all of this hinges on an accurate understanding and modelling of construction costs in the first place!

If you’re one of our Hub members, check out our training session with Tom.

Money is drawn down in pre-determined stages

Part of the planning before construction will include how much money is paid out and when. These are called ‘stage payments’ and at BuildStore there are three options:
- Valuation based arrears – Payments are made when the value of your plot or property increases.
- Stage payments in arrears – Money is released on completion of each stage of your build.
- Advanced stage payments – Money is provided in advance and based on your costings for that stage.
There are pros and cons to each of these mortgages but ultimately it comes down to your personal circumstances as to which is more appropriate.

For example, if you were embracing off-site manufacturing for your house build then you may have some significant costs upfront.

“The advanced stage payment, the accelerator mortgages as its known, delivers the money into the customer’s bank account prior to the beginning of each stage, which allows them to pay for their superstructure in a timely fashion. And it’s a complete mitigator of risk again, you know exactly what you’re getting at each stage.”

There is a degree of uncertainty with valuation based mortgages

For this product the stage payments are based upon a valuation in arrears. This means there is no guarantee of how much you will receive at each stage, because it will depend on the independent valuation that is carried out.

Therefore for projects where the property’s value temporarily decreases after the completion of a stage — such as when a barn is stripped back during a conversion — the valuation-based model may not be the best fit.

“If I’m adding a large wraparound extension to my home, I can use the same stage payment mortgages, but of course at some point I’ll create openings in the walls to create an extended area, my property that could be worth 300,000 could drop to 150 in value, because it’s no longer even wind and watertight.”

Secure your mortgage as early as possible

Every project is different and will require a tailored approach, and so you put yourself in the best position by starting the conversation early.

Even if you plan to use cash for most of the build, still engage early

If you have a lump sum to get your project started and think that you can secure a mortgage later, perhaps during construction, then you may be in for a shock. Setting up a mortgage takes time. It may be better to work with your mortgage adviser to form a plan incorporating your own funds.

For example, you might draw down a small amount early on to get the mortgage live and then use your own funds, safe in the knowledge that you have funds in place to complete the entire build.

Draw down your money when you need it

Whilst you could borrow funds for the entire project at the beginning of the process it probably doesn’t make sense as you would be paying interest on the whole amount when you don’t need it all yet. Therefore if you draw down only the amount you need for each stage, you will be minimising these charges.

“So if I’ve got a build project, it’s going to take me 14 months, I don’t want to take £300,000 on day one and service that debt, I’d rather take £30,000 for my foundations on day one, and make an interest only payment on £30,000.”

Other ‘safety nets’ can be put in place

BuildStore not only provides mortgage advice but will keep in touch throughout the project with monthly check-ins. In addition, they offer site insurance during construction and a 10-year structural warranty which goes live upon completion.

You may also want to explore personal insurance which would cover you against changing circumstances such as redundancy, critical illness and bereavement.

Self build mortgages are temporary products

As the name might suggest this is a mortgage that helps you get through the build. Sometimes you may even choose to pay interest only.

So once a completion certificate has been issued it makes sense to switch to a standard residential mortgage, often with a free switch facility. This approach ensures clients transition smoothly to a longer-term mortgage that best suits their needs.

Make sure your mortgage advisor has access to all lenders

Tom’s closing advice emphasises the importance of early engagement and accurate budgeting in self-build projects. He advises that clients work with industry specialists who have access to all lenders and product types to avoid issues like running out of funds or delays in receiving stage payments.

“I’m not going to my GP for surgery, I’m going to go and deal with someone who knows specifically, that’s what they do day in and day out.”

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August 14, 2024
HPH259 : Constructing the masonry superstructure of Portree Passivhaus – with Mike Coe

Mike Coe has a progress report from Portree Passivhaus, which is now almost watertight. We pick up the story as the groundworks begin and look at some of the challenges as the superstructure has gone up.

Mike Coe on the roof at Portree Passivhaus

Interview with Mike Coe

Mike Coe has been on the podcast a number of times. Our first interview with him was when he completed building the Cropthorne Autonomous House, where we imagined he might stay put for many years. However, with concerns over climate change, he and his partner Lizzie Stoodley decided to move further north to the Isle of Skye in Scotland.

This meant selling the autonomous house, which was not straightforward, and taking on a second project with well known architects Rural Design.

A section of Portree Passivhaus

A visualisation of the finished house

The sloping site was perfect for upside down living

Mike’s previous house, the Cropthorne Autonomous House, had bedrooms downstairs, and the living space and kitchen upstairs. Mike prefers this layout and was keen to repeat it.

That’s why one of the attractions of the site was its slope. The main entrance could be at the top of the house, taking you directly into the living space.

The dig begins

‘Rotten rock’ is discovered

Rotten Rock provides a perfect base from which to build

Mike explains that whenever anyone builds on Skye they look for ‘rotten rock’, which is a combination of the normal clay subsoil but with volcanic small rock particles mixed in. This makes a stable foundation that you can build straight onto.

Although they were digging into the hill, the rotten rock is almost solid enough to dispense with a retaining wall (but not quite!).

The Cropthorne Autonomous House

His first self build guided a lot of decisions

At the autonomous house the heavyweight structure of the building was used as a thermal store, which would build up heat during the summer and slowly give it back over the winter.

Hence Mike wanted to repeat what he knew worked well. Portree Passivhaus is a masonry building with a cavity wall.

This is unusual for Scotland which has a lot of timber frame buildings, that are quick to put up in the inclement weather.

Resilience was another key factor

The building’s heavyweight structure will also make it a ‘fortress’ for whatever weather is to come.

I think it’s inevitable that we’re going to get more extreme weather. We haven’t had that much of it in the UK yet, but there’s rarely a week when there isn’t some kind of extreme weather event somewhere in the world which makes it into the news.

The slab of insulation goes in

The building sits on a tray of insulation

Concrete is poured into a tray of insulation to form the lower ground floor slab. The internal concrete block walls then get built onto the edges of that slab, so the internal part of the house is completely isolated.

The cavity wall is 375mm wide and uses TeploTies for low thermal transmissivity.

With a large open plan living area, the building requires a steel structure for extra support.

The first floor is a beam and block floor, and above this there will be a green roof.

We’ve got a very substantial roof structure in order to take the weight of the soil on which the grass will grow on the roof. But below that, sitting on top of the structural I-beams, there’s another layer of insulation.

There is no environmentally benign dwelling

Mike is well informed when it comes to climate change and believes that we, as a world, could be doing so much more to reduce carbon emissions. So why is he building with masonry when more sustainable materials exist?

There’s undoubtedly embodied energy in this house. How significant it is in terms of global carbon emissions compared to things that could be very, very easily avoided, I don’t know. In use, the house will have a tiny environmental footprint. It’s very energy efficient, it doesn’t have a heating system, it’ll have renewable energy systems as well.

Although it will be a number of years into the future, Mike says the house will pay back its CO2 debt. And for him it’s not just about preventing climate change, this is a house that’s ready to face the extreme weather events that have been caused by climate change.

When you look to the future it’s not going to blow down. And the turf roof is part of the resilience strategy.

Mike installing the ventilation ducting

Mike gradually took on more responsibility

Having been very hands-on during his first self build, he had wanted to do less this time. However, he’s found himself being drawn in!

Due to concerns over finances, he decided to save some money by installing the mechanical ventilation system and doing all the electrics himself.

But knowing the level of detail required on a project like this, he’s also monitoring quality.

It’s all about during and post construction quality control. And trying to get across the message that the insulation has got to be kept clean and dry – difficult in this climate – as dry as possible and put in neatly without any gaps – I don’t know why but it’s just proved to be very tough.

So Mike has spent weekends pulling insulation out, cleaning it, putting it back again. He’s also taken responsibility for some of the trickier details.

Mike spotted a thermal bridge across the cavity

With an architect and contractor who haven’t built a Passivhaus before, Mike’s experience has become extremely useful. During construction he noticed that the steel was creating a thermal bridge across the cavity.

The solution was to shorten the steels and put thermal break pads in. Using stainless steel bolts also helped reduce the transmission across the steel.

Delays have had an upside

Mike’s contractor has had to start another project for a local hotel and this has meant a reduced workforce on Mike’s site.

However, as pensioners, Mike and Lizzie have been able to squirrel away extra cash.

This gives Mike cautious optimism that he could get towards the end of the project… and even hire decorators (something they’d really like to do).

Stone cladding begins

The main living space

Find out more

Visit the website of Portree Passivhaus

Follow Mike Coe on Twitter

Follow Portree Passivhaus on Twitter

Transcript

Download a transcript of the interview with Mike Coe.

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July 29, 2019
HPH257 : 4 ways a self build project can go wrong – with Ben Adam-Smith
Ben Adam-Smith runs through the biggest problems you could face on your self build journey. He also looks at what can be done in those situations.

There’s no end of challenges on a self build

It’s worth pointing out that there will be many ups and downs during a project. We could easily compile a list of a hundred things that could go wrong!

However, most of the time, there is a way forward and any hiccup will be forgotten about in a few days (or at worst leave a lesson for ‘next time’).

What we’re talking about today are the key things that can go wrong that may be hard or even impossible to fix.

1. Running out of money

No matter how much you do yourself, money is the life blood of the project. Without money, progress will be hard and the project is likely to stop.

In some ways most self-builders run out of money! The difference is when it happens. If it happens towards the end when the home is at least habitable then it’s annoying, yes, but you can move in and finish off little jobs as money becomes available.

A word of warning

It’s a lot easier to get everything done before you move in. Once you’re living in the house there’s a horrible tendency to make do. The pressure of needing to move in can even be a useful driver to get those final jobs completed.

Running out of money before the home is habitable

Nobody wants to end up here. There are times to stop a self build and in the middle of construction is not one of them.

It’s extremely difficult to dig yourself out of this hole because there will be ongoing costs of stopping the project, such as site insurance.

Why does it happen?

The main reasons for running out of money are because of:
- A change of circumstances – for example, the loss of a job and therefore inability to secure a mortgage
- Overspending somewhere else – perhaps sinking more money into the ground than you would have liked
- Losing money during the project – if a contractor goes bust, for example, and you don’t have adequate cover
- Burying your head in the sand about how much money you’ve got and how far it will go
Getting out of a financial mess

There’s no two ways about it, this will be an uphill struggle. In a worst case scenario selling the site is a possibility. You may come out of it having lost money but at least you will not have the ongoing torment of a half finished project.

If your project is still ahead of you and you’re worried you could get into trouble then get your budget as detailed as possible upfront. And keep refining… it’s never finished.

Always make sure you’ve got a contingency. In addition to a contingency fund, if the worst comes to the worst, is there an asset you could sell or a wealthy relative who might consider loaning you some money?

Think about whether there are any parts of the project that could be phased. For example, don’t build the house and the garage together if you think you won’t have the money to finish the house. Make the house the priority.

2. A relationship break down

Building a house is a team sport and that means dealing with people. In addition to professionals you may be building with a partner and have a balancing act there, too! And not forgetting where you’re building: it is possible your new neighbours may not be too keen on what you’re up to.

The important thing to mention here is communication. Most relationships turn sour due to some communication breakdown and this rarely happens overnight. So keep the conversation going and make sure everyone is up to speed. If someone feels alienated or undervalued then problems are brewing.

Some of the biggest challenges with architects/builders etc. come with issues around quality or reliability. Or, on the flip side, perhaps you as the client are being unrealistic or too demanding.

There’s no doubt that friction in relationships can leave a bitter taste. And it can go beyond the point of no return. Even if it is for the best going your separate ways, there will inevitably be knock-on effects such as delays and additional cost.

3. Stress overload

Even on a project that goes well, you can get fatigue towards the end. So when everything goes against you, stress can mount.

In the worst case scenario this can result in a total breakdown, which will leave you out of action on your project and hating your house for months or even years to come.

Heed the warning signs

Again, this isn’t something that happens overnight. It’s normally to do with seeing a lack of progress and feeling out of control. You may be anxious and the situation could even be triggered by one of the situations we’ve already talked about (money, people).

If you feel you have taken on too much and you can’t see a way out then this is a warning sign to make a change.

Bring in reinforcement

Normally you can change something. Sometimes you see self-builders embark on a project, wanting to do it all themselves. It’s perhaps a romantic view of what it should be like.

If you’re able to get back-up, even in a small way, it can make a lot of difference.

And it may seem like you can’t get away, but taking a break – even for a day – can clear your mind. You’ve really got to pinpoint what is causing the stress.

4. Rushing the process

Most self-builders get to the end of the process with a sense of achievement and pride. Yes, there will always be things they could have done differently but overall they have stayed the course and created a far better home than anything available on the open market.

For some, though, the completed house is a disappointment and doesn’t meet their expectations.

And this regret is almost always caused by rushing the design process and then making up a lot of it as you go.

Invest in good design

It’s amazing the money you can save by doing things yourself, but you are unlikely to get the same outcome as if you’d hired a professional. So unless you bring skills to the table, leave it to the professionals. And as with so many things in life, you get what you pay for.

Develop a comprehensive brief!

Any professionals you bring on board are not psychic (well, you can’t expect this as part of the service!). Therefore your brief needs to be crystal clear. Rather than being desperate to get building, enjoy spending time developing your plans.

Make sure you understand what you’re building. To those who aren’t familiar with 2D drawings it can be tricky to get a sense of space, so use all visualisation tools at your disposal.

And again, get your project specified properly in the design process. If you’re doing it during construction phase then you’re adding to your workload.

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July 6, 2019
HPH253 : Would property investors buy sustainable homes? – with Rob Bence

Property developer and podcaster, Rob Bence, advises on what’s needed for undertaking a successful building development project.

Exploring a new House Planning Help construction project

For the last 6 years we have been following House Planning Help founder Ben Adam-Smith on his self build journey. Having completed this in 2018 Ben is now beginning a new chapter, to deliver a small scale development of high performance, ecological homes.

As with his self build, we’ll be sharing the highs and lows right here on the podcast. So in today’s session, we look at whether it would be a good idea to target our development at property investors.

Interview with Rob Bence

The Property Hub, that Rob Bence started with Rob Dix, has come a long way from its beginnings producing the weekly Property Podcast. By engaging with their listeners they built a website and forum where they could interact and learn what the needs of the community were, and build their business accordingly.

Being self-confessed control freaks has helped their business develop!

The first stage of their business was about sourcing properties, where they often worked with developers.

The natural next step was setting up a letting agency, enabling them to be in control of the service levels.

Feedback from the community was that they couldn’t get good tax advice, so a tax business came next, with a mortgage service also later being brought in-house to ensure they had control over the process.

The development side was almost inevitable:

“And I think because we’re control freaks, we thought, we’re doing all of the other stuff. If we can build the product and then have it exactly as we want it and build it as we would choose, then we can control the whole process and the whole service journey from start to end.“

No property will appeal to all investors

Rob doesn’t believe that building sustainable homes would appeal to all property investors, but some are becoming increasingly interested about offering a better service and product to their clients, rather than just being focused on yield. So while it may not yet be mainstream for a tenant, there is likely to be a greater demand from investors in the future.

Investors want hassle-free properties

Ultimately, investors want their properties to be let quickly, and with as few issues as possible. A well-built home should make the latter more achievable.

They also want the home to be desirable, so the periods where it is standing empty are kept to a minimum. And being a long-term investment, they are looking at capital growth.

Rob thinks that unique, sustainable homes that are built to a higher standard will perform better from a capital growth point of view than cheaply built homes that will start to look tired after only a few years.

Ask letting agents what typifies their best performing properties

As they’re dealing with investors and tenants on a daily basis, letting agents are best placed to understand what makes a property desirable in their local area.

Often it might come down to proximity to schools, transport links, and other amenities more typically found in the city centre, but actually there is plenty of opportunity to build investment properties in the suburbs.

“When you look at the rental market in suburban areas where people do want to rent, it’s often people’s homes that they’ve moved out of. They’re not professional landlords, it’s just they’ve moved on. And often those properties are tired and dated, and I think there’s an opportunity for high quality new builds to really stand out.”

Alternative financing options may be better than banks

If you already have construction experience then peer-to-peer lending might be an option to finance the development. They like to see a track record, so at the very least work with a team of people who do have experience in order to build your track record another way. If it’s your first project then rates might be a little higher, but they can be flexible, willing to lend and able to allocate the money quickly.

Beyond that, Rob suggests working with a finance broker (as opposed to a mortgage broker), and always going with recommendations wherever possible.

Rob advises trying either of these two options to finance the project, rather than using banks. He says banks may lend to you but will want so much security against the development that you may as well fund it yourself.

There are pros and cons to selling a development upfront

Rob thought that agreeing a price and selling developments upfront would impress lenders, but he says actually this is not something they are that concerned with.

What has worked well for them is getting their ‘exit’ out of the way early in the process so they know they have the money.

What it does mean however is that you’re locked into a price and could fall foul of rising build costs, or miss out on capital growth from market changes.

“So, it’s great and it’s nice from a security point of view, but there are some downsides. And you make a choice. You can sell them at the end and not have that security but then possibly get more of an uplift, or you can just lock-in today and know what you’re dealing with.”

It hasn’t all been plain sailing for them so far

Property Hub Homes made a loss on their first development but were lucky their other businesses were doing well and could absorb that loss.

They found it a painful experience but learned valuable lessons. Rob says that while they made lots of mistakes, not having the right team of people on the project was the biggest. He recommends paying for the right people, even if they cost a bit more, because they can make the difference between a profit or a loss.

Scrutinise your budget and plans

If you work with a development financier or peer-to-peer lender, they will probably have their own quantity surveyor who will check your plan and figures and decide whether the project is viable, or whether you’re just being overly optimistic!

If you want further reassurance, Rob suggests paying for an independent surveyor. The cost of a mistake or something priced incorrectly, could be more than covered by their fee.

Rob’s main advice is to have your numbers checked right at the beginning and invite criticism and challenges to your plans, ideas and timeframes. Even if their responses may be disheartening, you should encourage them and investigate their validity. It will be a lot cheaper to investigate it before you get started than doing it later on.

Build a quality team

For those just starting out in development, Rob recommends forming a team that has a good estimator, quantity surveyor and someone good at procurement.

Their own projects these days are significantly larger and their team is now made up of a construction director, senior quantity surveyor, procurement/estimator, site manager and a land buyer. He says the size of team they currently have is probably overkill for what they need, but reflects where they want to be going and prepares them for bigger projects. As he says, the cost of getting it wrong can be so big that he considers the investment to be totally worthwhile.

www.matthewglloyd.co.uk

Be clear on your outcome

Understanding what you want your outcome to be will help you make better decisions at the outset. With so many decisions that will need to be made, knowing what you want from your development will help make that process a lot easier. It will also help you judge at the end whether the project has been a success or not.

Don’t go too crazy with your first development!

Rob says that you will learn the most from your first development; what you like and dislike about being a developer, what projects you might be willing to undertake, whether you have the right team, the right business angle, the right model, whether you’re going after the right markets, etc.

“All those things you can have the answers in theory, but by being a practitioner, by actually doing it on whatever scale will help inform you and then guide you to make better choices moving on from there.”

www.matthewglloyd.co.uk

Find out more

Visit the website of Property Hub

Follow Property Hub on Twitter

Follow Rob Bence on Twitter

Transcript

Download a transcript of the interview with Rob Bence.

Please connect with me

Subscribe, rate and review the podcast in iTunes

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June 4, 2019
HPH241 : 10 tips for better budgeting on a self build – with Ben Adam-Smith

Ben Adam-Smith shares 10 tips for creating a budget, which is detailed and realistic.

1. Start a budget… and keep fine-tuning it!

The greatest sin is to be casual about this. A budget is an essential part of any construction project, and even if you haven’t done this before you must get to grips with it.

And budgets do not stay still. They will evolve with the project as more decisions are made on what is going to be built and how.

2. Start with cost tables

Initially your budget is going to be rough, but by nailing down (or playing with) a few variables you can start to get a broad picture.

It starts with land. What will be the finished value of the house on the street? You can come up with a figure for this by using websites such as RightMove to look at what other houses nearby have sold for. This will help you pin down a ceiling value and from there you can work backwards.

Other key questions:

What is the floor area going to be?

What will be the build quality?

What build route am I going to choose?

The self build magazines all have useful ‘cost per square metre’ tables that allow you to fill in the following equation.

Land cost + build cost + profit 20-30% < value of the finished house

3. Budget for the completed home, not a house build

The build cost is not all encompassing (as may seem logical to the uninitiated). So remember that there is lots more to consider than just the basic shell of the house, however finished that is.

Run through in your mind all the items that will make it a finished home. This may include things like…

Hard landscaping – driveways, paving, fences

Soft landscaping – laying turf, trees, hedges, plants

Interior – curtains/blinds, furniture, new equipment

There will also be things like the architect’s fees to factor in.

4. Set a contingency

If you’re creating a budget you need a contingency. There will always be unforeseen costs. If the professionals need a budget then so do you!

The jury is out as to what percentage of the overall budget it should be. For first-timers a minimum of 10% is a good idea.

For those who have more experience, maybe it will be closer to 5%. Needless to say most people dip into their contingency. Groundworks can often be a stage of the process with the biggest risk of an overspend.

5. Use a quantity surveyor

The problem with people who worry about cost is that they want to make as many cutbacks as possible. Sometimes consultants can seem expensive, but you’ve always got to remind yourself of the value they deliver.

Having a strong degree of cost certainty is a wonderful thing. And what better way is there of getting this than someone that does this day in day out.

6. Don’t overspend in the early days

When you discover that you can’t buy your dream plot for the money you thought you could, there is a temptation to spend more.

Unless you are consciously increasing your budget and can afford to, it’s dangerous to start down this road. Spending more early on means spending less later in the project. This is of course possible if it’s thought through but there has got to be a balance. It just doesn’t make sense to have the most amazing site, and then really be scrimping on what you build on it.

Adam Cohen had a buckets approach to the budget, whereby the buckets must balance. He says the bucket with the most flexibility is the ‘finishes’ bucket.

7. Invest in the fabric of the building

If money is tight, the logical thing is to build something smaller!

If you don’t think this option is right, then for heavens sake don’t scrimp on the building elements which will be really hard to change further down the line.

For example, reducing the specification of the insulation will save money but in the long term it’s a false economy.

Perhaps a better approach is to keep that investment in the fabric of the building and specify a cheaper kitchen. Kitchens can cost £5000 or £50,000! And it will be a lot easier to replace the kitchen than increasing the insulation levels at a later date.

8. Don’t be afraid to bring things to a halt

If you discover you don’t have the finances to see your project through, be brave and bring things to a halt. It may be a hard decision to make – particularly if you will lose some money in the process – but ending up with a half-built house will be a lot more stressful.

Don’t be a victim of the sunk cost fallacy.

And being flexible may allow you to phase parts of the project. For example, perhaps you can build a house but it’s the garage that will have to be put on hold.

9. Choose architects/designers who have a proven track record of building to budgets

If you make this a project priority, then you can enter into an agreement with your chosen architect/design that they must provide designs that can be built within the budget. And if they don’t end doing this, then the plans are deemed not fit for purpose and will not be paid for.

The good thing about this is that an architect/designer who does agree to this approach will go out of their way to keep the project on track.

10. Bank up your cost savings… don’t spend them

You can and will make savings on your project, but make sure these do not get immediately spent on something else. Instead put them in the contingency fund.

Related podcasts

How to budget for a house build

Budgeting for our eco home

What are the hidden costs of building a house?

Making Passive House homes affordable

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Rate and review the podcast on Stitcher

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February 8, 2019
HPH120 : What is a self build mortgage? – with Thomas Honour of BuildStore
Thomas Honour, mortgage adviser at BuildStore, explains the self build mortgage process.

Interview with Thomas Honour

In this interview we’ve returned to the National Self Build and Renovation Centre (NSBRC), this time to chat with Thomas Honour who works as an adviser with BuildStore mortgage services. BuildStore specialise in finance for projects, so self builds, custom builds, renovations etc. They have had a presence at the NSBRC since it opened, with a permanent base there for mortgage advisers who also contribute to the seminars on finance.

Consult a mortgage adviser at an early stage

This will help you to ascertain your borrowing capacity and determine whether your budget for the plot and build is is likely to be realistic.

Salary is the single most important factor in determining available finance, but other considerations will include things like ongoing credit commitments, childcare costs and any other significant outgoings.

Each lender is very different but typically they will apply an income multiplier of between 4 and 4.25 times the joint household income, with some treating bonus and overtime payments differently.

There are two different types of self build mortgage product

The main difference between a self build mortgage and a conventional mortgage is the way in which the funds are released. With a conventional mortgage you receive the funds in a lump sum, which together with your deposit, you use to purchase the property.

With self build mortgages the money is released typically in four or five stages, over two phases. The first phase is releasing money to purchase the plot and the second phase releases money to finance the build.

The traditional self build product provides money in arrears of the stage being completed. This works well for people that have larger deposits or who own the land, as they are putting in their own money upfront with the lender giving the money in arrears on completion.

Construction types such as insulated concrete formwork (ICF), structurally insulated panels (SIPs) and timber frame however often require a much larger payment to the manufacturer early in the project. BuildStore have designed their “Accelerator” product to mitigate these cash flow difficulties by giving the money in advance of each stage.

Your mortgage broker has a duty of care to ensure your mortgage is affordable to you

The mortgage broker and lender will work together to ensure that your build costs are reasonable and that they’re going to be plausible for the type of project that you are doing. This aims to prevent the need for anyone to return mid-project requesting more funds, with no guarantee they will be provided, and will likely cause delays.

On rare occasions people do return requesting additional funds. An additional loan known as a “further advance” or “additional advance” can be applied for to make sure that the build can be completed, subject to underwriting from the lender.

It’s important that budgets are broken down in detail. Sometimes people may not have considered contingencies and additional expenses such as architect fees, stamp duty on land, site insurance and structural warranties. A mortgage broker would rather decline an application upfront than put them in a position where they have a project they can’t complete because they don’t have enough money.

It is worth bearing in mind that most lenders will have some sort of caveat that the build must be completed within two years.

Since the mortgage market review by the regulator a couple of years ago there is a greater burden on the lender to ensure they are lending responsibly. While Thomas believes that this is right and should be the case, some of their affordability criteria does limit the amount that people can borrow which means they may need to put more down as a deposit.

There are costs to setting up a self build mortgage

This will vary from lender to lender but as with standard mortgages there will be costs to get it set up. These may include:
- An arrangement fee – most lenders will charge this as standard on any type of mortgage
- Valuation fee – this will value the plot based on its value at the time and what you’re paying for it. They will also give an end value based on what you’re planning to build and what they think it will be worth when completed. There is also a reinstatement value for site insurance purposes.
- Additional fees – some lenders may charge booking fees which are all quite similar but may be named differently.
The job of your broker is to ensure you’re aware of all the fees upfront to know what they are, what they cover, what they’re costing you and when they’re due.

A bridging facility may be suitable for people that have assets but a low income

Thomas uses the example of someone with a house worth £500,000 but a pension income of £10,000, but wanting to borrow more than a typical mortgage would allow them on that income.

Potentially there can be bridging finance secured against the existing home which would enable them to build their house. Money from the sale of their old home can then pay off the bridging facility.

Not all lenders will lend on all construction types

Non-standard constructions can be funded, however “non-standard” means different things to different lenders, so your mortgage broker will find a lender that is suitable for your project. Even timber frame, steel frame, SIPs and ICF constructions are considered non-standard by some lenders.

The reason why some lenders won’t lend on less traditional buildings is largely down to re-saleability. The lender is always thinking about if they had to take possession of the property how easy it would be to sell. For properties that might be an acquired taste they will be worried they may not get their money back.

The larger the deposit, the more favourable the interest rates

Typically the minimum deposit required will be around 10% of the overall project costs. The project cost is the combined land and build costs.

For someone that already owns the land outright, the value of the plot can be used as the deposit contribution, i.e. owning a plot with a value of £50,000 will provide £50,000 towards the deposit.

A larger deposit will give more favourable interest rates and may make more lenders available to you.

Find out more

Visit the BuildStore website

Follow BuildStore on Twitter

Transcript

Download a transcript of the interview with Thomas Honour.

The Hub update

We’d like to tell you a little bit about The Hub – what it is and why we’re doing it.

Support: A self build project can be a long journey so the community side of The Hub is a place to learn from others and be inspired by them.

Information: We’re already providing lots of information with our podcasts and videos on YouTube, but this is going a step further by trying to refine and organise it, making a step by step and easy to understand guide of what’s involved in a self build.

Videos: There’s huge potential for learning by video and here at Regen Media it’s what we specialise in.

As content creators and communicators, we can do much more, not only in The Hub, but also by adding free content and perhaps help other people to achieve more and spread their messages further. If we can save you time and money by making The Hub work, then hopefully you’re paying for a resource that you’re happy with and which is giving us more funds that we can use to create in other areas.

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March 16, 2016
HPH037 : Overcoming the Challenges of Self Build – with Jason Orme from Homebuilding & Renovating
Jason Orme, editor of Homebuilding & Renovating, shares some of the key challenges that self-builders face and what can be done to make sure they don’t become pitfalls. He also explains how custom build might be a good option to explore for those who want a bespoke home but without the same level of risk.

Interview with Jason Orme

Jason Orme was keen to become a journalist and so he applied for a job at Homebuilding & Renovating magazine. It was only after landing the role that he really began to increase his knowledge, and this eventually led to him buying a plot in 2004 and building a house. Now he has seen and written about hundreds if not thousands of projects and in his own words he is ‘a little bit obsessed by it.’

Finance and Plot Availability Prohibit Most People From Self Building

Jason says that since the recession of 2008 getting access to finance has become much harder. He does, however, believe that as the economy improves more and more mortgages will become available again.

By far the biggest problem is the availability of plots and therefore price of plots. The two are very closely linked. It’s not difficult to find a plot if you’ve got lots of cash!

Jason’s own self build

Even Great Architects Are Not Necessarily Good With Budgets

It is not uncommon that projects go over budget. If a project starts to go over budget on the first day then this is likely to be a sign of things to come. In Jason’s experience architects are great at designing houses but they are not so good at marrying up the budget to the design. People often have plans for large, complicated houses with lots of kit and a budget that is completely unrealistic.

A Quantity Surveyor Can Provide an Independent Assessment of the Project’s Cost

By running most things through a quantity surveyor, or QS, there is the opportunity to check the finances. A QS is an independent expert who will effectively do a full materials and labour schedule of your build from the plans the architect has produced. This means any potential problems are discovered in the planning stages rather than during the build.

Once ‘Out of the Ground’ Build Costs Should be Predictable

Jason recently met someone who had gone 50% over budget on a nearly £2 million build! So it can happen at all budget levels, big or small. There are certain elements that are difficult to budget for, such as the foundations, because you may not know the full story until you start, but Jason stresses that ‘above ground’ is manageable and quantifiable in most instances.

There’s Definitely a Sweet Spot When it Comes to House Size

The average floor area of a self-build house that Homebuilding & Renovating might feature is around 200m². This compares to a typical new estate house (in the UK) that might be 80m² or 90m². So the self-builders that Jason meets tend to build bigger houses. At the upper end of that scale he once saw a house that was 2000m²!

However Jason suggests that if a house is too cramped there can be averse affects: “David Snell, who continues to write for the magazine, always says that one of the great reasons for the breakdown in society is because houses are too small. So growing families, particularly when you’ve got teenage kids, they need their own space and it’s preferential if they’re in their own big bedroom with a bit of a guest suite rather than on the streets. My view is the same. I think homes should grow with families and be flexible enough to do that.”

Custom Build Should Take a Lot of the Risk Out of Self Building

Custom build is a subset of self-build and it aims to allow bespoke homes to be constructed but with the minimum of risk. It’s revitalising an old concept whereby a large area of land is divided into serviced plots and the planning for the whole site (rather than on an individual basis) is done upfront to speed up the process. Fixed priced build costs also enable people to be very clear of what they are letting themselves in for.

Graven Hill near Bicester in Oxfordshire is the UK’s largest scheme to date. Almere in Holland is often cited as one of the world’s most significant schemes.

Self-builders Tend to Have an Entrepreneurial Spirit

While lots of people desire to build a house (typically between 10-30% of the UK population of 63 million) when it comes down to the practicalities of finding land and so on, the figures drop off significantly. Currently there are 11,300 new self-builds per year in the UK.

Having met lots of self-builders, Jason believes that one trait they all have in common is an entrepreneurial spirit. Even if they come from different walks of life, they tend to be independent and have a strong desire to create something specifically for them rather than settling for any old house.

In Australia ‘Package’ Builds Make Life Easy

Jason likens the house building process in Australia to buying a new car: “You’ve got the basic package, you’ve got the optional extras, all of which is guaranteed in terms of price and scheduled delivery as well.”

Interestingly Australia deliver far more custom build homes (Jason says somewhere between 50,000 and 100,000 per year) than the UK despite having a smaller population of 23 million!

The UK’s Housing Market Will Continue to be Focussed on Second-Hand Stock

Even if custom build took off in the UK and 30,000 or 40,000 new houses were created each year, it would still be a small part of the market. This is because there are currently around 23 million houses in the UK, so the chances are that most people will be buying a second-hand house rather than a new custom build house.

Avoid the Eco Bling!

Certain products and materials have a lot of hype attached to them, and Jason says that people are often willing to throw a lot of money at gadgets thus making a slightly naïve specification.

Solar panel and heat pumps all have a place but often the money is far better being spent in the fabric of the building. Minimising energy use and the heat demand in the house is by far the smartest thing that people will do, particularly for those who are not on mains.

Invest in Expertise When it Comes to the Planning Process (UK)

Relying on an architect or design professional to guide you through the planning process could be a mistake. While architects may know a little about planning, their primary skill is design and so they are unlikely to be able to keep up with those minuscule changes to planning policy which happen frequently.

Finding a good planning consultant is an absolutely critical way of unlocking the potential of some sites.

Villages Often Lack Affordable Housing for Young Families

The UK has a unique situation in that it has a lack of land but also a cultural message to protect the countryside and preserve it as a museum.

Jason believes that the countryside is dying – with pubs, schools and other amenities constantly closing down – because there are no new houses to help young families live there. Yet development continues to be fought against.

Jason says: “I think we have to accept that if we want our children to live in these villages and towns then we have to allow house building in certain areas and better for it to be high quality of individual design ideally than for it to be the kind of housing stock that we’ve seen go up over the years.”

We Must Provide the Infrastructure for the Growing Population

Jason tells the story of how he was looking at an atlas with his 3-year-old son and the first page was about the world’s population. In the space of 100 years the population has jumped from around 1 billion to 6 billion.

When Ben challenges Jason as to whether new houses just encourage further population growth, Jason responds: “The fact is that people seem to want to come to want to come to the UK and people seem to want to have children, and I don’t think you can necessarily stop either of those. So to an extent you’ve got to face the fact that you need to create housing for them otherwise where are they going to live.”

Multigenerational Homes Could be an Option for the Future?

With affordable housing clearly a worldwide issue, one change could be a move towards multi-generational households where three generations of a family live under one roof.

A Smart Approach is Needed to Housing Development

The UK government have a figure of 250,000 for the number of new homes that are needed each year to cope with demand.

Jason believes that this hasn’t been achieved once since the 1960s and is unlikely to be met in the coming years. Jason also thinks that certain areas of the South East and the Midlands are approaching capacity and that it would make a lot more sense to spread the load around other parts of the UK where housing densities are comparatively low.

[The Internet is also making it easier to be very much in the heart of the business economy without being physically there!]

Homebuilding & Renovating Aims to Provide Independent Advice

The team at Homebuilding & Renovating have all been through the process of building their own houses and as such all their advice comes from experience. Newcomers to the world of self building will also find that there are lots of people who are trying to sell their products or services! Homebuilding & Renovating aims to provide independent advice, help you increase your knowledge and guide you through that jungle!

Winner of the Self Build Awards 2011. Copyright homebuilding.co.uk

It May Look Like Drama on TV, But it Doesn’t Have to be in Reality

While television programmes like Grand Designs inspire people to take on their own projects, they also create drama where there need not be drama. A few projects go over budget and over schedule but there are thousands that happen each year that don’t.

Jason concludes: “If you can get experts involved and listen to people, then generally it’s a lot easier than you might think . . . It’s a massively rewarding experience, life-changing really. It certainly was for us.”

A unique urban home. Copyright homebuilding.co.uk

Transcript

Download a transcript of the interview with Jason Orme.

Our Question for the Comments Section

What’s been the biggest challenge of your project so far? And how have you overcome it?

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December 4, 2013
Financing an Ecological Build – with Jon Lee from Ecology Building Society

Have you taken a serious look at the finances of your build?

Are you being realistic with how much money you have and how much you will be able to borrow?

In this article, I’m going to get an introduction to financing a low energy build with some help from Jon Lee, Business Development Manager at Ecology Building Society.

I must admit that the House Planning Help blog has almost entirely been consumed by design issues and working out what could be built. None of that has got realistic and considered cost but I’m hoping to change that now. Nobody wants to be the person who runs out of money and options, so where is that sweet spot of getting the finances just right?

Talk to a Number of Potential Finance Providers

This advice would make sense for any service one would hope to procure but it’s relevant here because there are various types of self build mortgage and it does depend on your own financial situation as to which route will be best to go down. Jon Lee says: “Some lenders will provide funds only at a time when you’ve already bought the plot and you’re actually improving the value of the site by physically building. Other lenders will be more comfortable helping towards the financial purchase of the land as long as it’s got planning consent.”

Payments Made Against Increasing Value of the Plot

As with any financing the lender will need security. In this case it is a plot of land, which will change in value at various stages throughout the build. “In those interim phases where actually you’re doing quite a lot of work on a self build, it doesn’t necessarily correlate with spend against improved value. There’s quite a curve there and as you get towards the end of the build you tend to add a lot of value for not much more spend.”

After kitchens and bathrooms (and so on) have gone in, it becomes a much more marketable asset.

Generally Stage Payments are Drawn Down in Arrears

Once you have an approved mortgage, there will be certain milestones where the interim value of the site is calculated. At these points your lender will work out how much of your retention can be drawn against that and a tranche payment is made in arrears of the work. However, some lenders offer an ‘accelerator’ mortgage which would provide funds in advance, so effectively giving you the money to do the next phase of works and then having the revaluation done. As this is more risky for the lender, ultimately it costs more.

Ideally You Would Have Equity to Borrow Against

Jon outlines a simple situation that shows why you would want to have a good sum of your own money invested in the project. Consider a plot that’s going to cost £100,000. If you needed to borrow £80,000 of that, the lender might look at your income and the scheme and think it looks interesting. Even though your plans for the plot may suggest that the finished project will be worth £250,000 if you’re borrowing £80,000 on day one you would have to consider where the funds are coming from for the rest of the build. At the Ecology Building Society the maximum loan to value is 90% on the residential mortgage, which would mean there’s only really another £10,000 available to help you proceed with the building work (unless you’ve got other capital or help from the bank of Mum and Dad, etc.).

In this scenario an accelerator mortgage would be most appropriate, but it would be more expensive in terms of interest fees and arrangement fees. Plus if the budget got out of hand or a contractor let you down, you may be sailing very close to the wind!

Ecology Building Society Like to Work with Valuers Who Understand Low Energy Builds

Jon stresses that it’s an important part of the process that both the valuer and the lender understand the type of construction, the materials being used and what the expected costings might be. Jon says: “We’d always ask the valuer to pass comment on whether they think the costings are realistic for what’s being proposed as well as taking on board the expertise or otherwise of the borrower themselves. They may well be serial self-builders. They could be people who have a background in building or architecture and so on and so forth. All of these things get taken into account.”

Don’t Over-Stretch Yourself

You may have read case studies of where multiple difficulties have led to the self or custom builder being unable to borrow any more. A good lender will be accessing the risk in the early stages. Jon explains: “Certainly the net book value of what is being mortgaged is inevitably a primary consideration as well as making sure that the borrower is not being over-stretched in terms of their ability to cover interest payments during the build phase, especially if they’re having to take a sabbatical from their day-job to see the project through.”

Don’t be Put Off if You Haven’t Been Through the Process Before

While it’s always preferable to have as much detail as possible about the cost of a build and quotes to back it up, Jon admits that some of the best schemes he’s seen have been from people who openly admit they haven’t got a formal business plan and are working their way through.

Not Being a Volume Lender Allows for a Much More Personal Service

Ecology Building Society underwrites about 20 to 25 mortgages a month. As they are not a volume lender they are more able to cope with projects on an individual basis. This is particularly relevant when that don’t necessarily fit the normal system.

Best Discounts For High Energy Efficiency

Clearly as the Ecology Building Society aims to support a more sustainable future, it offers its best discounts for projects that either benefit the environment or the community. Buildings that meet the Passivhaus standard are rewarded with the top of the range discount off their standard variable rate. Find out more about their C-Change discounts, which run from Passivhaus down to Code for Sustainable Homes Level 4 or properties that achieve at least a B-rating on an Energy Performance Certificate (EPC).

Underwriters Want to See Investment in the Building’s Envelope

As ecological construction is fundamental to their business, it falls to the underwriters to make decisions on granting these discounted mortgages. Jon continues: “Our staff are well trained to be able to look at, not only the projected EPC which any property needs to have [in the UK] but also to look in more detail at the materials that have been used. For example, we don’t lend on new builds even if they do achieve the required level if the borrower is putting in UPVC windows and doors. We’d be looking for other clues that sustainable materials were at the heart of the build so things like a good standard of glazing, decent levels of insulation, natural materials and where possible locally-sourced materials.”

They will also not rule out other options – such as a kit home that’s been sourced and shipped from Sweden – so as long as it’s still using sustainable materials.

Talk to Your Finance Provider Early on

As with most members of the construction team, it makes sense for your finance provide to be involved from the initial stages. In other words, don’t wait until you’ve bought the plot before you begin to look for finance. Lenders like to take everything into account at the early stages. Jon highlights why this is a good idea: “We can maybe advise them as to how much deposit they should be considering putting forward at the land purchase stage, how much they need to hold back for some of the works and work out the project with them in partnership so that you’ve got a really clear timeline and stress-tested cash flow. We can then see what happens if there’s a bit of a move in interest rates, if there’s a bit of a move in property prices, if heaven forbid costs start to rise, so that we can see what the sort of risk appraisal is and advise on the project in a very hands-on way to try and mitigate against nasty surprises.”

Expect Some Challenges During the Build

All projects will have aspects that change. Jon cannot remember any project that has gone exactly as planned where the budget has been spot on. Of course sometimes that can be in your favour and savings can be made on what you thought you were going to borrow. Assuming that a 10% contingency will get you out of all problems could be a mistake.

Stress-Testing is to Help Not Hinder

Applying a stress-test on a project and considering different eventualities makes sure that both the borrower and the lender have got a good understanding of what’s going to happen. It brings clarity over who’s going to be doing what and how things will be certified.

Develop a Personal Relationship with Your Borrower

Jon’s final bit of advice is to get to know your lender and to have a personal relationship where ever possible. Going through a broker will put you at arms length from whoever is providing the finance. As well as adding an extra layer of cost, you don’t get that rapport to be able to tackle problems that may crop up during the build.

Visit the Ecology Building Society for more information and case studies.

Follow Ecology Building Society on Twitter

How are you going to finance your build? Have you got a healthy contingency planned?

August 9, 2013