Cash is king is a phrase you hear a lot in business. Without the liquidity offered by cash, everything grinds to a halt: bills don’t get paid; suppliers stop supplying; and your project stalls.
It’s no different with self-building, where keeping a positive cash flow throughout the process is critical. If you run out of funds and fail to pay the bills, problems will quickly stack up and your project could start to become a Grand Designs-style burden. It doesn’t have to be like that, though. Hopefully these tips will help you keep things on track and make your scheme a success.
You can’t expect me to write an article involving money without making my standard pleas about setting a realistic budget. Starting out with rose-tinted glasses firmly in place and inadequate funds for what you want to build is a basic error – and the one that’s most likely to cause your project to fail.
Construct a home that reflects your true budget; not what you think you’d like to have. You can’t assume a limited amount of money will simply stretch to suit your scheme, regardless of size, quality and complexity. It won’t. In fact, it will run out very quickly.
Self-building can be an affordable route to getting a high-quality home, but as a rule it still tends to cost a bit (and sometimes a lot) more than you think it will. For this reason, it’s always sensible to allocate a contingency of 10% into your overall construction costs (excluding land).
The ‘into’ part of that sentence is important. This isn’t something to raid for frivolous extras; it’s there as cover should something go awry. Trust me, you’ll use it and when you do, you’ll be grateful it’s there.
Most of us will need to secure a loan to fund our self-build projects – but the options are limited. Typically, the high street lenders aren’t really interested in one-off homes. It may be a multi-billion pound sector, but in the banks’ eyes it’s still relatively niche and dwarfed by the housing market at large.
Mortgages are secured against assets (things like finished houses) that can be sold if the loanee defaults. So asking banks to offer funds against a plot of land on the promise that, one day, there will be a valuable property on it – if they’re prepared to pay for it to be constructed – can give them an attack of the vapours.
In the early days of self-build, some enlightened lenders started offering phased mortgage products – but only in arrears. This meant you would have to finance the early part of the work with your own funds until there was something tangible, like the shell of the house, which could be used as collateral. These products are still common and a good option for those who can stump up the early cash.
For the rest of us, the cavalry arrived when mortgage brokers BuildStore were the first
to spot we’re a switched-on bunch of people who don’t take on projects on a whim. They realised the typical self-builder does their homework, knuckles down to the task and invariably gets over the finish line to create their dream home.
BuildStore approached some of the smaller lenders and persuaded them to offer the money in advance, with any risk of failure offset by an insurance policy paid for by the client as part of their arrangement fees. The Accelerator mortgage was born and it has since allowed many people, including yours truly, to realise their ambition to build their own home.
This product introduces a positive cash flow from day one. What’s more, it can be used to finance both the land purchase and your build costs in separate stages. The loan amount is agreed in principle before you start looking for a site, so you can strike quickly when the right plot appears.
For instance, if you buy land at auction, the exchange of contracts occurs when the hammer falls and a deposit is payable there and then, with the balance in around 28 days.
Once you’ve purchased the land, the subsequent construction costs are broken down into manageable stages. These could include groundworks to DPC (damp proof course); first floor level; wall plate; wind and watertight; first and second fix; and then the remaining funds needed to complete the project.
Cash is released for the next phase once site inspections by a structural warranty provider confirm the work so far is satisfactory. This advance of funds is critical: it allows you to pay for work and commit to the next build stage with confidence.
It’s worth bearing in mind that some construction methods will make more of a demand on your cash flow than others. Timber frame and system build packages tend to require a significant deposit up front before the company concerned invests in manufacturing your home, and they will invariably require payment in full once the structure is up.
As both of these events tend to happen quite quickly and at an early phase of the project, you need to be ready for them. If you’ve arranged a self-build mortgage, this should be accounted for in the stage payments.
Traditional masonry builds will often allow you to spread the delivery of, and therefore the payment for, materials over a longer period. This will make for a more even cash flow during the work.
While self-builders can recover the VAT paid on fixed materials used in the build, what is often forgotten is that under HMRC’s DIY reclaim process (VAT Notice 431) you have to pay out the tax before you can claim it back. This makes VAT a critical cash flow consideration. I remember borrowing £15,000 from my dear mother-in-law and paying her back with interest once the reclaim came through.
There is a way of avoiding this hit on your cash flow: If you are using a VAT registered builder, you can always ask them to deal with the tax at their end so you don’t have to pay. But do make sure you are not paying full retail price on the materials they order, as that will negate the purpose of the exercise. Ask to see the receipts and any discounts obtained.
Remember that, for self-builds, labour is zero rated – so you shouldn’t pay the VAT on this in the first place.
Another more recent cash flow consideration is if you are building while living in your current home. If you buy another house to knock down and redevelop, or purchase land classed as residential, you will be obliged to pay the 3% Stamp Duty Land Tax (SDLT) surcharge introduced by George Osborne.
This is because you will technically own two houses, albeit that you plan to sell one when the new build is complete. The surcharge does not apply to non-residential land.
The good news is that you can claim the 3% surcharge back provided you sell your previous main residence within 36 months of the purchase of the second asset. Of course, the amount of SDLT paid depends on the price of the plot, but it will need to be factored into your funding plans.
It’s important to keep an eye on expenditure throughout the build, as well as to retain original receipts for the VAT reclaim process. Most people I know manage this using a simple Excel spreadsheet, with tabs for materials and the associated VAT liability (which can be reclaimed) and professional fees and the VAT incurred (which can’t).
There are specialised software tools available to do this, most notably through HBXL, but you’ll need to pay for a license to be able use the product. Whether it’s a worthwhile investment really depends on how big and complex your project is. I would suggest that for most straightforward schemes, the spreadsheet route is all you’ll need as it’s cheap and effective.
If you’re a cash builder, then life will be easier for you, but it is still essential to stick to your budget and keep a contingency for those moments when ‘stuff’ happens and generates unexpected costs. If you need a mortgage, speak to the specialists at BuildStore as a first port of call because they understand the self-build market in a way that the high street lenders don’t.
Ultimately, this will be the biggest shopping trip you ever make, and because it is your money you will undoubtedly make sure that your available cash is spent wisely. Keeping a positive cash flow throughout makes the whole process easier to manage and ultimately a far more enjoyable experience, so make it a priority.