The consumer responsibility of the Financial Conduct Authority (FCA) represents a significant step in the regulatory landscape, requiring more than just compliance – it requires an active commitment to deliver consistently good results to customers. This is more important than that in the world of experts and often misunderstood self- and custom-built mortgages.
Unlike traditional borrowers who buy turnkey homes, self-built clients can take on unique financial, logistical and project management risks. They not only bought property, but also planned the construction of future houses. This introduces a crucial cash flow dependency: ensuring that funds are available when needed to pay the contractor, purchase materials and maintain on-site progress.
For many, the stage payment of mortgages has become the only viable financing route. However, the lack of self-building inquiry means that many brokers have limited hands-on experience in browsing this nuanced loan environment. Therefore, the risk of consumer harm due to product misalignment, cash flow gaps, or project failure is very real.
Cash flow: The crux of compliance
The cornerstone of consumer responsibilities is to prevent foreseeable harm. However, one of the most predictable threats in the self-building journey is the loss between available funds and payment milestones. Whether it is due to a budget or an inappropriate product selection, the gap in critical stages can delay progress or worse, or worse, stop building altogether, putting both borrowers and lenders at great risk.
The construction cost varies greatly according to the construction method and the construction route. The timetables for brickwork are more evenly distributed, while off-site methods such as timber frames require a lot of capital early on – usually even before the building is erected. Similarly, the contractual nature of a turnkey agreement introduces a strict payment schedule, which, if missed, may constitute a breach of the contract.
In this context, product selection must go far beyond LTV and title rates. Brokers must ensure that the collateral product is exactly consistent with the need to build cash flow. However, procurement systems continue to favor practical prices, encouraging competition to put consumer outcomes at risk.
Valuation-based loans vs. Cost-based loans: Understanding the trade-offs
Broadly speaking, a self-built mortgage market is divided into two ways:
- Valuation-based mortgage According to the appraiser’s assessment of part of the construction property, the funds are released after inspection. While feasible for cash-rich borrowers with existing interests, the model introduces uncertainty. Early spending, especially in modern or off-site approaches, does not usually immediately reflect on the on-site value, increasing the risk of funding shortages.
- Cost-based mortgageBy contrast, provide advance payments that are consistent with customer budget costs. Typically, these products can choose to fund advance, provide greater certainty and can give up to 95% of the total cost of the project. For customers who rely on precise budgeting and timely spending, the structure determines whether the build is feasible or doomed to fail from the beginning.
Network and lenders: Raise the bar for broker support
Being a consultant operating as a designated representative (ARS) depends heavily on their network for compliance guidance and product governance. To meet the GST standards, the network must improve its framework to ensure that brokers’ recommendations not only reflect affordability, but also improve feasibility and reduce risk. This includes comprehensive training, due diligence tools and access to expert support if needed.
The obligation to build responsibly
As the industry continues to embed the principle of consumer obligations, self-construction finance stands out and is an area where traditional indicators are insufficient. For brokers, lenders and networks, adopting a more comprehensive, customer-centric approach is not only recommended, it is essential.
In self-building, good advice is more than just rates and fees. It’s about the foundation – finance and structure. What makes them right is what turns the blueprint into a house.
Chris Martin is Buildloan Director of Operations
