The picture has changed for custom build finance, with a far wider range of routes on offer for securing the money to bring on your custom homes site. And finance was previously one of the three main barriers to custom build growth, along with access to land and the planning process, as recognised by the Government in its March 2017 Self-build and Custom Build Housing (England) Briefing Paper.
Like all property finance, custom build finance is split into consumer and development funding:
Consumer finance refers to the individual funding the public needs access to in order to secure funding, typically a mortgage, to buy a custom home. Look out next month for our in-depth look at consumer options in custom build finance.
Development finance refers to the monies that stakeholders, such as local government or developers, access to bring on housing.
Development finance is further split into money allocated for the development or infrastructure or for housing. Finance may be obtained to bring on one or the other aspect, or both together, often depending on the size of the site.
Frequently, custom build finance options have been lumped together with self-build, but this is unhelpful, both for development and consumer finance, as the sectors are distinctly different.
When permissioning custom build sites, it’s helpful if local authorities are aware of, and able to advise about, the financial challenges facing individuals and enablers working to bring on or buy custom build homes.
Consumer finance is an important element to have in place on any site, and local authorities can decide to take up products that help meet this need.
For example, Arlingclose’s Bespoke Custom Build product enables councils to partner up with it to provide a route to consumer finance to facilitate the process. Find out how South Cambs District Council used this product to bring on custom build in its region.
As a previously unknown route to home building, until recently custom build companies struggled to borrow to fund developments. But with Government endorsement underpinned by legislation, the custom build finance situation has improved.
Much has changed in the industry, with new funds and products being launched that are specifically aimed at the sector.
There’s a growing number of challenger banks and lenders willing to advance funds which may consider custom build, although this is still relatively limited in comparison to the options available to developers bringing on conventional homes.
Companies operating in property development finance include Affirmative Finance and Amicus Finance which operate in short term development lending. Head to Google to research, or check with UK Finance, which represents over 300 finance and banking companies.
When mainstream routes prove challenging, an alternative route to finance can be a Government-backed scheme.
With the housing crisis a priority for Government, it has set up funds that offer solutions to both consumer and development funding. These can be grant-based, where the money is not returned, or loan based, such as revolving funds, where the money is paid back with interest.
The Homes and Communities Agency’s (soon to be Homes England) Home Building Fund is the go-to fund for custom build. It’s designed to step up when mainstream finance routes are too costly, with custom build finance very much in its remit. In fact, it’s mentioned in the document’s introductory paragraph!
In total, the fund has £3 billion available to loan out, and it’s a flexible fund that’s open to a range of applicants, both short term and long term, including custom homes and cohousing.
The fund was created by merging the Builders Finance Fund, the Large Sites Infrastructure Programme and Build to Rent. The Home Building Fund also replaced the Custom Build Investment Fund and the Custom Build Serviced Plots Loan Fund, which are now closed.
Home Building Fund quick facts:
|£1 billion short-term development loan funding for bringing on housing, up to 25,000 homes.|
|£2 billion long-term infrastructure loan funding – enough to bring on 200,000 homes|
|Loan amounts vary between £250,000 to £250 million.|
|Interest is payable at transparent, pre-agreed, variable rates, with an arrangement fee.|
|Typical terms are up to five years for development finance, or up to 20 years for infrastructure.|
Other Government finance schemes:
Councils have the option to borrow under the Prudential Regime, enabling them to fund development projects through borrowing, as opposed to using capital receipts or money collected through taxes etc. To do this, they will typically access the Public Works Loan Board (PWLB).
The PWLB is the statutory body that issues loans to local authorities and other bodies from the National Loans Fund. The PWLB will always offer the best return for a local authority. Its operational responsibility falls to the DMO (Debt Management Office).
Read Local Government in England: Capital Finance for Government’s briefing on finance
In addition to Government finance schemes, there are also numerous local government or regional funds available. For example, the London Housing Bank or the Sheffield City Region Housing Fund. These are worth investigating – speak to your local housing team in the council who should be able to advise what’s on offer locally.
Small and Medium Enterprise companies (SMEs) looking for finance can also take advantage of advisors that help them source funding at the right level, such as the Find SME Finance.
Community groups are an alternative to developer- or enabler-led development. Typically made up of members of the public, they need to be aware of all the funding options for bringing on custom homes, both development and consumer finance.
These projects will also require some level of infrastructure finance, but this would typically be combined into one loan with the development money, due to the size of the projects.
Community groups often create new ways of working, and this sector has made good use of crowd-funding or peer-to-peer lending, such as Landbay. Equally, specialist ethical lenders, such as Triodos Bank, may consider groups with a community element.
Some companies have also adopted this approach, using these finance streams to fund specific aspects of a build, such as site purchase. For example, HAB Housing has used mini-bonds to create a fund for the purchase of land.
The Co-operative Councils Innovative Network’s report Community-Led Housing: Key Role for Local Authorities is packed full of advice and case studies to support councils permissioning and working with community-led housing initiatives, including self-build and collective custom build sites. It lists the following Government routes to funding:
The Government’s Community Housing Fund was relaunched in November 2017 and will provide £60m per year for CLH in England over four years.
The Welsh Government supports CLH schemes through the Welsh Co-operative Centre. In Scotland communities can apply to the Scottish Government’s Rural and Island Housing Funds.
Looking further afield, custom build is considerably more established in some other countries, which have developed their own solutions to finance. NaCSBA is reviewing the viability of some of the European routes to finance, and whether they could be replicated in England. You can find out more about alternative routes to finance at NaCSBA’s Right to Build Toolkit.
Other finance products
Finally, as with all build sites, the correct indemnities and warranties need to be in place on sites. Developments need to insured from purchase, throughout work and through to completion, with 10-year warranties providing a guarantee of the work.
The Self-build and Custom Housebuilding Act 2015 (as amended by the Housing and Planning Act 2016) sets out the legal framework for custom build.