If you really want to get into scratch building small scale model parts - in a big way! I'd recommend looking at CNC. It’s a lot of fun watching the machine cut part after part, with total precision and repeatability too!
Proxxon sell a small milling machine, model No. MF70. It's a small, high speed spindle designed to use dremel type tools and carbide pcb drills. It's build solidly enough to machine non ferrous, brass, aluminium etc. It retails at £200 as a manual machine and there's a brilliant CNC conversion available for it from:
Sondermaschinen und Vorrichtungsbau USOVO 
They even sell an automatic toolchanger for it! Ebay Item Number 230226498540
The bad news is that the CNC converted machine retails at £518 so that’s the £500 gone!
This guy uses one:
Z-PANZER.COM - The ONLY place for Z scale armor
He makes 1/220 scale military vehicles for Z Gauge model railways! The detail is astounding, you have to remember the vehicles are just over an inch long!
If that is too much of a chunk, I’d recommend buying a Proxxon Grinder or Dremel type and a little drill stand for one of those. Proxxon again do a nice one, they also sell a little milling cross table to allow some very light machining in plastics and wood.
MICROMOT precision drill grinder FBS 12/E 
Micro compound table KT 70 
MICROMOT drill stand MB 140/S 