Building blocks

The old adage might be that an Englishman’s home is his castle but for an increasing number of Brits, the castle is having to be built from scratch. New-build and self-build are becoming increasingly popular options for would-be homeowners, but still represent a relatively small niche within the mortgage market.

This though, would seem to be a slightly archaic statement, considering that it is a rapidly increasing market. However, this is a sector that is still suffering from some teething problems, which are restricting it to the equivalent of a wispy rhododendron, rather than a mighty oak.

Inadequate choices

Much of this stunting can be attributed to an inadequate choice of funding. Joe Wiggins, head of media relations at Abbey, explains: “There aren’t that many specific new-build mortgage providers and, previously, borrowers would be forced to opt for an ordinary mortgage arrangement on a new-build property.”

Abbey has only been in the new-build market for little over two months, with its move into the sector instigated as part of its Spanish owner, Banco Santander Central Hispano’s, search for new areas for the Abbey brand to expand. However, the lender is very much bucking the trend when it comes to new-build finance, especially when it comes to buy-to-let (BTL) mortgages.

Much of the industry has seemingly been moving in the opposite direction, with lenders restricting their lending criteria, especially on loan-to-value, and in the case of The Mortgage Works, the intermediary arm of Portman Building Society, moving out of the market completely.

Paul Howard, director of intermediary sales, explains: “We are not lending on new-build BTL temporarily, as there are forces at work that are having an affect on the value of properties. Other lenders are doing the same, so the choice of products and lenders is reducing as a result.

“New-build accounted for 10 per cent of our lending and it was important to us, without misrepresenting the bulk of what we do. We became aware, though, of several cases of misrepresentation of the true purchase price and this undermined our confidence in the market.”

This subversion of confidence among lenders is having a knock-on effect in terms of the products available to clients, and Phil Jay, managing director of BDS, believes this can only get worse.

He says: “The trouble for the lenders is when one or two pull out of the market, the ones that remain get flooded with the same kind of business and they don’t want to have too much of the same thing on their books.”

Accountability and fairness

With lenders currently heading for the hills, this would point to a distant downturn in what future buy-to-let investors can expect to be available. The solution, therefore, must be for the industry as a whole to work together at each stage to ensure accountability and fairness at all levels.

Jay continues: “That sort of facility is there to be abused by the wrong sort of people. If the person is working with the right broker and the lender is told everything, then it can work well. Buy-to-let is a good market to be in but as brokers, packagers and lenders, we need to get everything in order and make sure the client can carry it out.”

However, it is not just the buy-to-let side that is currently undergoing significant upheaval. The Northern Irish market is set for a major overhaul thanks to changes announced by the Department of Regional Development (DRD) regarding planning rules.

Under the new guidelines, it will now become much more difficult to obtain planning permission for a new home, whether it be a self-build or a replacement dwelling.

Stephen Hinds, regional surveyor for Northern Ireland at e.surv, explains: “The situation is now that existing applications made before 16 March 2006 will apply under the old rules. However, a 12-week consultation period has been launched which constitutes a 12-week blanket ban on all new-build.

“If the application shows that you need to live in the countryside, for example if you are a farmer or a retired farmer, you may get the application through. However, replacement dwellings won’t be allowed any more and only a few social dwellings, which the council has in small hamlets, might be passed.”


The move has already had an impact on the entire Northern Irish market, with prices starting to head upwards. The market was already buoyant, with the Halifax House Price Index charting a 17.6 per cent increase in prices in the first quarter of 2006, on the back of a 29.8 per cent annual rise on March 2005. However, with 12,000 applications expected to be filed this year, the hiatus in the sanctioning can only drive prices higher as supply dries up.

Hinds adds: “We have a soaring market at the minute and we are already seeing the price of existing dwellings go up.”

However, the question of supply isn’t restricted to Northern Ireland. The properties currently being offered by developers is now being questioned as a glut of similar style houses begin to take up certain areas of the market.

This problem has epitomised recently in Birmingham, where owners were falling into negative equity because of the mass availability of similar property in the area.

Sarah Gwilt, mortgage adviser at Dickson Lishman Prince, comments: “In Birmingham, there has been a lot of canalside developments in recent years and a lots of flats on the market. People are finding now what was deemed to be a fantastic site two years ago has seen four or five more developments spring up so what was a trendy area to buy has lost its edge.

“I had one client who was offered a £20,000 discount by the developer for one of the last plots available, a two-bedroom property, on one development. Seven months later, when he came to me to sort out a new mortgage arrangement, we found it had been down-valued by £40,000 so he lost out.”

This problem is not just restricted to Birmingham and holds resonance across many city developments. The Docklands area of London is just one example where a glut of one and two-bedroom apartments has made it difficult for firms to shift stock. However, in the South East, this problem is spilling out into the commuter towns as prices in London force people to look elsewhere for affordable housing.

Wiggins comments: “Developments around towns tend to be flats, especially in the South East as commuters move out of London as prices there increase. People are moving out because of affordability and developers are building for the buy-to-let market.”

However, as the developments move out of cities and into provincial towns and the countryside, a similar problem is encountered with a plethora of executive three, four and five-bedroom houses.

Linda Will, managing director of Accord Mortgages, explains: “There used to be a mixture of properties on sites but now instead of offering some one and two-bedroom houses, a few three-bedrooms and some four-bedrooms, now they are spending more on building four and five-bedroom houses.

“A lot of new-build builders are moving up in the market and while the medium-sized areas are really resilient, it’s the lower end of the market that is struggling. There have been some attempts at mixed plots but you often end up with just one kind of property dominating and taking over.”

Break from the norm

One answer to the problem of monotonous developments is to build your own home. Self-build is another niche market which has enjoyed considerable growth in recent times; partly helped by the high cost of housing and the abundance of home make-over shows on television.

John Hay, head of marketing at Buildstore, says: “There is a mixture of things behind self-building. One reason is to get what you want. There might be certain things people want and existing property won’t have it. If you are looking in the market, you are limited to new-build developments and what is already out there in the market. Also, it helps you to get it in the place that you want and the third reason is equity. It is a very good way of building up equity in a property by building it yourself.”

However, the problems associated with the new-build sector are much more acute in the self-build market. This is especially so in terms of funding. While the number of lenders and products are increasing, the way finance is supplied is still causing a problem for clients.

James Cotton, mortgage specialist at London & Country, says: “One of the many problems is that the building happens in five or six stages and lenders often release funds in dribs and drabs. This causes a problem for the client as they need to sort the cash out to start with.”

Most lenders will only provide funding once a stage has neared completion, meaning that the client is often stuck with a negative cashflow.

Hay believes it is important that clients get the money up front. He explains: “We have developed a scheme which gives the borrower a high amount of cash. We give them 95 per cent of the cost of the land and we divide the build into five or six stages. Then we give them 95 per cent of the cost of each stage and we lend to them upfront so they have a positive cashflow.

“It is designed to help cashflow and, because we lend to them upfront, they don’t have to sell their old houses and live in rented accommodation so they save considerable money on renting.”

Despite this, most lenders remain behind their policy of supplying funding towards the end of the stage.

Simon Biddle, head of marketing and communications at Infinity Mortgages, sums up this position. He says: “At Infinity we have just introduced a stage payment policy for self-builders as we recognise the importance of this approach to supporting the new-build market. We are an ardent supporter of the new-build market and we do believe it is reasonable to make the advances at the completion of specific stages of the property build.”

Broker role

However, it isn’t just the lenders that can help develop the self-build market. Brokers have a significant role to play too as, in a world where margins are constantly under attack from various sources, they cannot afford to exclude themselves from sections of the mortgage market; especially those which are showing impressive growth.

Mike Fitzgerald, sales director at Brentchase Financial Services, comments: “Every self-build brings its own problems so brokers must understand all the planning and building regulations and local authority sensitivities. They must start by looking at the products and doing their homework but if they get involved in the right way, it can be fairly lucrative.”

It must remembered though that the new-build and self-build sectors of the market are still very much niche areas and there is still much to be done before finding and securing a mortgage is as straightforward as on an established property. However, as those already involved can testify, it is a vibrant market that will continue to grow, especially with property prices at their current levels. Therefore, the mortgage industry must continue to innovate and offer attractive propositions to clients if the sector is to achieve its full potential.