17 Jan 2018

Consumer finance: custom build mortgages and cohousing funding options

Consumer finance: custom build mortgages and cohousing funding options

Whether you’re a local authority permissioning serviced plots or a developer marketing homes, it’s important that you know what custom build mortgages are available. This offers surety at the planning stage that the consumer finance to complete the site is available in the market.

Mortgage finance for custom homes and cohousing has improved dramatically in the last few years, with an increasing range of banks and building societies offering products.

Initial lack of understanding and concerns about risk have reduced for specialist lenders, as the route has become more common. Many of these products are available through brokers and packagers, who are able to advise about these specialised lending routes.

Self-build mortgages

Unlike a conventional mortgage where you pay once the house is completed, traditional self-build mortgages involve a more flexible approach.

This is usually through one of two products, either a traditional Arrears Stage Payment Mortgage, which pays out on completion of each stage, or an Advanced Stage Payment Mortgage, which pays out prior to the start of each phase of work, offering improved cash flow.

Because of the limited number of dedicated custom build mortgage products, some self-build mortgages get used on custom build developments, even though the product is different.

This is because many custom build developments operate on a self-build principle, using serviced plots on enabled sites, often where the consumer can choose their contractor.

So although the homes may be on a development of numerous homes, each one is following an individual build route. This is effectively enabled self-build.

Find out more about self-build mortgages at Build It.

Custom build mortgages

There are still relatively few custom build sites in the strictest sense, where consumers choose a plot and then select from a range of pre-agreed contractors to build their home, such as Heartlands in Cornwall.

Dedicated custom build mortgages exist to service the market for this type of development, and we hope to see more come online as more sites come forward.

These are typically a two-phase product, with phase one enabling plot purchase, and phase two the build.

Custom Build Homes lists the first phase of custom build mortgages as covering the Plot Reservation Fee, House Design and Approval Fee, and Serviced Plot Payment, with the second phase covering the Custom Build Stage Payments.

Virgin Money recently entered this market with a tailored custom build mortgage offering, the first mainstream lender to do so. The product is available via Custom Build Homes from BuildStore.

Virgin Money launches first mainstream custom build mortgages

Help To Buy 

Mainstream housing is effectively subsidised by the Government’s Help to Buy Equity scheme, which is only available at the completion stage of house buying.

It’s not available on custom build properties, which are reliant on plot transfers at the start of the process, ie Golden Brick, which is what offers savings through VAT and CIL exemption.

And while the 2014 Coalition Government’s Budget promised to look into extending Help To Buy, nothing so far has changed.

NaCSBA is campaigning for a Help to Build that would put custom build on an even footing with Help to Buy, as listed in point two its Manifesto:

Introduce a ‘Help to Build’ equity loan scheme for affordable self build homes to help more people get on the housing ladder and deliver a more diversified supply of new homes.

This would enable the custom homes sector to compete more evenly with mainstream builders.

Some larger custom homes developers are looking at work arounds for Help to Buy. Graven Hill’s tailored homes are eligible for Help To Buy, with buyers able to select from a range of options to finish their tailored home.

This process is more akin to buying off-plan, but it was felt that it was important that some element of Graven Hill was able to offer Help To Buy, and open the site up in terms of greater affordability.


Graven Hill offers Help to Buy on Tailored-finish homes

However, for Help To Buy to work on custom build sites, what is effectively happening behind the scenes is that the vendor is deferring their payment from the customer to the end of the process.

Therefore the developer takes on additional risk, as they are funding the build, and this could well impact on CIL exemptions.

As it stands this means that SMEs will still be the least able companies to take on risk, meaning the smallest are least able to compete with the mainstream market.

Balancing the Help to Buy custom build conundrum

Brokers and packagers

A range of specialist companies exist to help consumers navigate the financing choices, such as brokers and companies including chartered financial planners and advisors, such as Mary Riley Solutions.

Many companies work in this arena as introducers, bringing the customer together with the lender, a principle that also works in developer funding.

While BuildStore offers mortgages direct to the public, its BuildLoan business is a packaging arm, dealing with brokers and developing bespoke products.

Recently it’s hosted a range of broker training days to increase local knowledge of self-build and custom build finance options, ensuring that advisors have the most up-to-date knowledge of this specialist market.

And BuildLoan can also work with developers and authorities to ensure finance packages are viable prior to developments going ahead.

Local authority involvement

In addition, a few companies are able to offer mortgage solutions in partnership with local authorities, such as independent treasury advisor Arlingclose.

These products are designed to bridge the gap between consumers and local authority projects, again, ensuring councils that the right finance will be in place to enable customers to purchase.

Arlingclose’s Bespoke Custom Build (BCB) product enables councils to partner with them as a way to offer consumer finance on developments.

BCB is a partnership between local authorities, mortgage lenders and Arlingclose that offers 95% Loan To Value mortgages on new, bespoke and customised homes, removing the need for stage payments. South Cambridgeshire District Council used the BCB product, click here for more.

This is a crucial consideration for all custom build, as stage payments can be a barrier to engagement for many who would traditionally buy on the open market.

Currently, mainstream buyers don’t pay for their home as it’s built, so effectively custom build needs to be able to offer the same if it’s to open itself up to the widest possible market and truly scale up.

Again, perceptions may vary depending on whether you’re marketing a finished, tailored product with a developer involved, or a plot transfer at Golden Brick.

Finance for cohousing

More and more alternatives finance models have come on stream in the last few years, which can be of relevance to cohousing groups. These grass-roots microfinance choices include crowd funding, peer-to-peer lending and bond releases.

These routes are often associated with companies with an emphasis on ethics, such as Kevin McCloud’s HAB Housing, which used crowd-funding through Crowdcube to raise money for future growth.

Bridport Cohousing is using such an approach to fund its land purchase, inviting friends, members and supporters to make loans over £1,000 to help it raise £250,000.

Socially-responsible companies and community-led groups, such as cohousing or community land trusts, may also be able to apply for additional finance streams from specialist lenders with an ethical focus.

UK Cohousing or the Community Land Trust Network are useful starting points for sourcing companies.

For example, the Ecology Building Society provides mortgages for community led projects, such as Cambridge Cohousing’s Marmalade Lane, as well as individual self-builds with green credentials. Elsewhere, Triodos Bank funded LILAC cohousing, and it remains committed to funding housing associations due to their ability to create affordable housing. Other banks that consider cohousing include Charity Bank and Unity Trust Bank.

There are Government led initiatives too. The Community Led Housing Fund is a Government scheme that offers a route to finance, especially in areas affected by second-home ownership such as the South West.

The Home Building Fund has also loaned money to cohousing projects, with £3.86 million to Cannock Mill Cohousing Colchester to help the scheme get going.

There are also a handful of independent, grant-awarding bodies that work with alternative housing supply, such as the Tudor Trust, which works with voluntary and community groups.

These can be a source of funding for groups such as cohousing or community land trusts. For example, Tudor awarded money to the Older Women’s Cohousing Group, while RUSS is currently bidding for money from Aviva Community Fund.


OWCH’s top ten tips for successful cohousing groups

Insurances and warranties

Finally, as with all build sites, the correct indemnities and warranties need to be in place on sites. These must include a self-build insurance policy, or equivalent for custom build, and a structural warranty to cover the 10-year period for warranty against defects in design, workmanship and materials.

Insurance also needs to cover public liability, fire, theft, storm damage and unfinished work or a contractor/developer going bust.

There are numerous specialist companies operating in the custom and self build arena, including Custom Build Strategy’s sponsor, Build-Zone Insurance.

Build-Zone’s Paul Kempton has this advice:

  • Always use proper written contracts for everyone engaged in the process, including professionals, suppliers of goods and services and tradespeople. Breach of Contract is the most common cause of complaint on builds and verbal contracts are not sufficient.
  • Make sure that any contractor who works on your house is fully insured with a reputable (‘A’-rated) insurer and make sure you see original proof of this. This could be the policy itself or a dated letter on headed paper from their FCA-registered broker. This means they have professional indemnity insurance in place.
  • Lenders will want assurance that the property is protected in terms of site insurance. As soon as a main contractor or enabling developer finishes their work, or the prospective purchaser acquires an interest or starts work, they need to make sure they have adequate insurances already in place.
    Materials, tools and equipment within your property need to be covered, as well as friends and relatives who may be working on the property in a self-finish capacity.
  • You owe your insurer a duty of care. Make sure that the site is protected and kept secure to help prevent incidences in the first instance. Prevention is better than cure and saves time in the end.
  • You and your Lender should make sure that your property has a 10 year Structural Warranty from an ‘A’-rated Insurer. The process required to get this needs to start at the outset of the project.
  • Don’t rely on Professional Consultants Certification (sometimes called Architect’s Certification) as it only provides cover for six years and is incumbent on you to prove negligence.

Read Paul Kempton’s blog, here.

Tax and exemptions

Purchasers who buy plots benefit from their build being VAT free – hence the Golden Brick plot transfer process that enables this in custom build. This offers a saving not available on the mainstream housing market and means that stamp Duty Land Tax is due on the plot only.

2017’s Housing White Paper confirmed that custom and self-build homes will remain exempt from the Community Infrastructure Levy (CIL) planning fee, although there is a CIL review being conducted that may change this situation.

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