22 Mar 2016

Custom build mortgage finance is discussed in the first of two features by Raymond Connor

Raymond Connor
Custom build mortgage finance is discussed in the first of two features by Raymond Connor Raymond Connor, CEO, BuildStore

Custom build exists on a spectrum that inevitably morphs into self build at one extreme. And the grey area between the two models can cause a few issues, as Raymond Connor, CEO of BuildStore explains: “From a lending perspective the custom build industry has shot itself in the foot by trying to make too big a distinction between custom and self build,” he says.

“The impact of this is that some lenders claim that they don’t yet know enough about custom build to have a presence in the market. But in fact, if I said that Mr X is building a house on plot Y at development Z, then the lender would be fine. It’s the new term custom build that’s the issue,” he says.

But beyond the ideology, Connor explains that the term custom build itself is somewhat misleading. “While self build is a traditional route to home ownership, custom build itself should be split into two models. On one hand you’ve got the developers’ approach to custom build with serviced land that’s been built to a stage, such as Golden Brick, and then completed by the developer.

“But on the other you’ve got sites with serviced plots being provided for self builders. These buyers then have the choice to finish the build themselves or appoint their own contractors, sort of a ‘custom build light’ approach, which is what we’re expecting to see at Graven Hill.

“It’s a question of semantics really,” says Connor. “The Government could have taken a lot of uncertainty out of the market if it had used the Self-build and Custom Housebuilding Act 2015 to state that, from that point on, everything that’s not a speculative build comes under the umbrella term of custom build.

“The public isn’t hung up with the terminology either. People don’t really see themselves as custom or a self builders, and the industry needs to acknowledge this,” he says. “Those that have a pre-existing interest in self build simply view custom build as a new route to land, which has really opened up the market.

“But the flip side of this is a new market of people who have never previously considered building their own home, and it’s these people that the enabling developers have been looking for. About half of the sales on French Fields came from direct advertising on Rightmove. This new market needed a whole new approach in terms of marketing and working with them so that the custom build enablers could help them access the model,” he says.

Dedicated finance

With regards to products, custom build finance is tailored to the individual fact find and also to the build route. For the majority of self and custom build projects, the payment profile will release money in stage payments, such as with BuildStore’s Accelerator mortgage.

Lenders in the market have dedicated lending policies, for example buy-to-let, and several are now starting to look at separate self build and custom build products, such as Chorely Building Society, which has just launched a dedicated custom build mortgage.

“But there are significant barriers to custom build finance for consumers in that currently the most you’ll be able to borrow on a self build mortgage is 80% End Loan to Value (LTV), and  until we get to 90-95%  we can’t compete with Help to Buy,” says Connor. “And although this will come as the lenders start to loosen up, you won’t get the volume custom build until these products exist.”

“For example, we’re working with an institutional developer in Essex with 200 units valued at £300,000 each. Effectively, with a standard LTV of 80% the purchasers will have to put down £60,000, which is really big ask for most people. It’s certainly a long way away from mainstream affordability,” he says.

What’s more, currently most of the volume lenders are not in the position to offer stage payment mortgages, explains Connor, which is an issue. “But we’ve put forward a proposition for a third-party stage payment provider, and several lenders that we spoke to were open to this as it’s quite normal for them to outsource,” he says.

The upshot of the volume builders’ lack of engagement is that it’s the smaller lenders who are innovating in this market, and as the leading packager and broker of custom build mortgages, BuildStore is working with them. “The reality is that, as yet, the custom build market is still fairly compact in terms of the amount of products needed to service it,” explains Connor, “and for now, the small lenders can meet this demand.”

What’s more, the Government should acknowledge that this specialist market is better able to supply this business as it’s important to those lenders operating in it and they’ll service it well, too. “This harks back to the founding principles of the original building societies,” says Connor, “and the customer can always choose to remortgage with a larger lender at a later choice if they so wish.”

Editor’s comment

Connor is right in saying that custom build must be able to compete with Help To Buy if it’s to fulfil its potential. To do this it needs dedicated products that work in conjunction with the various models with a high LTV, and it’s imperative that these are straight forward. This has to be the case to that the products are accessible to the average person considering a custom build as an alternative to a conventional new build or just buying on the open market. This target group hold the potential to drive custom build into the mainstream.

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