Private Finance’s Mortgage Memo – 14th July 2022

Borrower self-build loans comparatively cheap

Rates for self-build products have not changed significantly relative to the rest of the market where rates have increased at their fastest rate since 2012 in the six months to May. Self-build now appears to be a rather effective way to borrow both on a property to build from the ground up or also one that needs heavy refurbishment.

• Self-build mortgage rates have traditionally been between 3.5 and 4.5%. Nowadays these rates are closer to 4%, and when this is compared to most residential mortgages now in the 3%s, these self-build rates aren’t too much of a premium to pay for the flexibility and customisation they allow.
• The market for self-builds grew during the pandemic, where we saw an increasing number of clients and new enquiries alike looking into self-build mortgages to acquire their dream homes in the wake of limited housing stock in the market. The UK needs new residential homes and these rates may motivate some borrowers to build rather than buy, thus alleviating the housing supply shortage in the long run if planning can be gained and flexibility given by local councils.
• There are often significant savings and capital gains in undertaking a self-build compared to buying an existing home, however the process can be highly stressful and with the increasing costs of construction materials, self-builders need to have contingency plans in place for extra costs that can emerge during the process. It is lengthy process and it may take a couple of years for the right plot to come along.
• We see this as a large area for growth over the next few years, especially with government support and schemes being implemented too.

More lender innovation needed for existing borrowers to improve home energy performance

Amid a cost-of-living crisis and squeezed household budgets, we have had clients both on the buy to let and residential homeowner side of the coin expressing concerns regarding cash flow to improve home energy performance and EPC ratings. We believe lenders need to do more to ensure existing borrowers can easily access funds to improve their property’s EPC rating. Mortgage lender CHL released a refurbishment product range last week showcasing product innovation designed to improve EPC ratings and we’d love to see more of this.

• Borrowers are most likely to be constrained by affordability when looking to borrow to improve their EPC rating. We believe more innovation is needed in this area, possibly in the form of government interest-free loans for lenders or where a borrower could have some comfort in an amount of money raised specifically for a purpose that has a direct effect on the property value with an improved EPC.
• The cost to upgrade a property EPC rating from D to C would vary depending on the type of property, calculated to be approximately between £3,000 for a one-bed flat to £6,400 for a small mid-terrace house. Offering incentives around EPC upgrades may only be feasible for some types of households where the cost to improve an EPC rating is smaller.
• EPC ratings already factor into some people’s decision when buying a house. We have seen clients recently reject a property due to a poor EPC rating, where the EPC could not be improved unless a costly full revamp of the property was completed. We expect more to prioritise EPC ratings as energy prices and the cost to heat a home continue to rise, and the new generation who are may be more environmentally focused get onto the property ladder.