Is Now The Time To Build A Dream Home?

Posted on: 14 May 2009 by Gareth Hargreaves

Recession is breathing new life into one sector of the housing market - more buyers are considering building or renovating instead of buying a new home.

The number of subscribers to one service that matches would-be builders with plots has increased by 50% since January, for example.

The economic slowdown means the price of building land has fallen, as have some material and labour costs. And for those without significant housing equity, building your own home can be a quick way up the property ladder.

But for all the opportunities, most build-it-yourself (BIY) buyers still need a mortgage. And self-build loans have not escaped the credit squeeze.

We look at the self-build market through the eyes of four participants.

The Seasoned Self Builder

A casual detour into an estate agents' office while on holiday in 2007 changed the life of Paul and Jillian Vaughan.

The retired couple from Durham fell in love with a spectacular building plot on the cliffs above Polperro, Cornwall. Paul, 58, says: “We had always wanted to retire to the sea and this seemed the perfect spot.”

The couple have built three homes previously in the North East, but sold the last of these in 2001.

Recession has brought their scheme forward. Paul, who used to run a textile business, says: “We sold our previous home last year, fortunately ahead of the worst of the downturn, and put the proceeds on deposit with the idea of starting building in 2010.

“But the fall in interest rates means the money is going to earn less than half of what it did. We thought it made sense to bring the project forward.”

Work started on site last month to create a dormer-style bungalow, which will incorporate a large attic studio. Jillian, 56, and Paul are sourcing a lot of the fixtures for the house themselves, including kitchen, bathrooms, the heating system, stairs and internal joinery.

Paul says: “The recession means I am getting some extremely good prices at the moment. You can drive a hard bargain with builder's merchants.”

Why self-build in the first place? Paul says: “You have an amazing freedom to customise your home. If you are working with good contractors, you really can create a unique home with a better quality and finish than if you are buying from a developer.”

For example, Jillian and Paul are going to heat their home using an eco-friendly ground source heat pump that will draw heat from two bore holes. Self-build does not necessarily mean laying every brick yourself. Most BIYers employ professionals to help or even sub-contract the whole project.

While Paul and Jillian have managed previous projects themselves, this time they have employed building firm B&BJ Phillips to handle the project and manage sub-contractors. Again, the slowdown in the construction industry has influenced Paul's thinking.

“We saw some very competitive quotes and that has made the difference between me having to manage the project myself and being able to hire in the expertise,” he says. “I feel very lucky to have found a builder who is exceptionally receptive to what we want to do.”

The couple have budgeted £375,000 for the land and building costs, but when the building is finished in October they expect to end up with a home worth up to 20% more than that.

The Mortgage Lender

Richard Barker is mortgage product manager at Norwich & Peterborough Building Society, which offers specialist home loans to BIY-ers.

“On any self-build project there is the risk of the building not being completed,” he says. “In the current market we are concerned about the risks of builders going bust.”

In common with other lenders, N&P has tightened up on its loans. Barker says: “We used to lend up to 85% of the purchase price of the land and up to 85% of the finished value of the home, but have restricted that to a maximum 75% loan to value.”

But even at 75% LTV, self-build can still be a way on to the property ladder for borrowers who do not have huge deposits. This is because the LTV is calculated against the estimated market value of the completed home. Typically, the total cost of buying the land and completing the build might be 20 to 30% less than this final value.

Barker says: “Part of the reason more people are turning to self-build is that you can end up building yourself a home and creating a substantial slice of equity at the same time.”

Most self-build loans are arranged in phases. Borrowers draw down slices of the overall loan as they complete phases of the project.

For example, 15% might be advanced when the house foundations are complete and a further 15% when the walls reach first floor height. A surveyor inspects the work at each stage before releasing the next slice of the loan.

Interest rates on self-build loans can be higher than on conventional mortgages, partly reflecting the extra administration and inspections required. HBOS, for example, has a loan fixed at 5.79% for three years, with a fee of 1.5%. This is sold through its BM Solutions broker arm.

N&P, meanwhile, has a five year fix at 6.54% with a fee of £895. Barker says: “Come and talk to a lender at the very early stage before you've even gone out looking at sites to make sure what you're considering is achievable.”

The Self-Build Entrepreneur

A greater availability of land will help more families to build their own homes. That is the view of Raymond Connor, chief executive at BuildStore, which offers a range of services and support to self-builders, including mortgage finance and discounted materials. 'There are about 9,000 building plots available via our PlotSearch.co.uk database, which is up 50% from a year ago,” he says.

“We've seen professional builders and developers, who were previously stockpiling land, being forced to release this back on to the market because they need the cash or they cannot afford to develop it themselves.”

Overall, he says the average price of a plot has come down 20% in the past six months, falling from £243,584 in November to £195,171 at the end of April. The recession has also made it easier for amateur home builders to find the skilled help they need. The average project needs 19 different trades, ranging from plasterers to architects.

Connor says: “The labour market has moved in your favour. Builders can start more quickly and are much more enthusiastic about taking on self-build work.” And average costs of materials and labour are falling.

The Building Cost Information Service, which monitors construction prices across the UK, says domestic building costs have fallen by 3.2% since a peak last August. However, there will be variations across the regions, with prices stable or even rising in some local hotspots.

The First-Timers

Lynn Brennan is planning to mark her 50th birthday later this month in style - by moving into the cottage that she and her husband Kevin have built.

The four-bedroom cottage in traditional Suffolk style is due for completion at the end of May. The downturn has been a mixed blessing for the Brennans.

Lynn, a chef at an Italian restaurant, says: “We had been thinking about building our own place for years, but every decent building plot would be snapped up by developers before it got anywhere near the market. It was only when things slowed down that we could get the site we wanted.”

The couple bought a bungalow on a plot in East Bergholt, Suffolk, then demolished it last summer to start building the cottage. The original plan was to pay for the project by selling their previous home, but the sluggish property market made that impossible.

Instead, Lynn and Kevin, 49, have rented out their home for two years to help cover mortgage costs while they and their sons, Joshua, 19, and Callum, 16, 'camp out' in a holiday home in East Bergholt until the new cottage is finished.

The building costs are instead being covered by a self-build mortgage with Norwich & Peterborough Building Society.

Lynn says: “I don't think the slowdown has really hit the skilled tradesmen. We wanted to work with craftsmen who were recommended to us and in our experience there is still plenty of demand for the best people.”

All told, the land, demolition and new build will have cost Kevin and Lynn about £500,000, but the couple should end up with a home worth about £650,000. Lynn says: “I don't think we will rush off and build another one straightaway. I want to enjoy the house, but I wouldn't rule it out in the future because we have learnt so much on this one.”

What About Staying Put & Extending

If building or renovating an entire home seems a bit daunting, you could consider converting an attic or building an extension.

Builders are more willing to take on smaller domestic jobs and to quote a competitive price for it. And a change to the planning laws in England and Wales last October means many smaller projects no longer need planning permission, cutting down red-tape and project fees. Go to planningportal.gov.uk.

While many homeowners will feel this is not the time to run down savings or extend borrowings, those who are secure in their job and finances could bag a bargain.

Richard Morea of mortgage broker London & Country in Bath, Somerset, says: “In this slow housing market I think more people are weighing up the potential of extending or improving their home rather than moving. And if you need to borrow more to pay for improvements, relatively cheap rates make it a good time to do so.”

But those thinking of home improvements must be careful. Some projects do not necessarily improve the value of a home, according to research by HSBC. Extensions, loft conversions, conservatories and new kitchens give the biggest boost, according to the bank's panel of property valuers.

On average, a loft conversion adds £13,567 in value above the cost of the work while building an extra room adds £13,285. By contrast, redecorating or recarpeting a house had only a marginal impact on values, with almost of half of surveyors saying they made no difference to prices.

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