A HOMEBUYER’S GUIDE TO NEW BUILD MORTGAGES BY DANIEL MCLARDY
New Build Homes are a vital part of the British property market, and while arguably new-build activity has failed to keep pace with the demand for housing, in our local markets the evidence of builder appetite to create new homes is plain to see. Edinburgh is a case-in-point, with notable new build activity in outlying areas of Scotland’s capital extending East to West. In the West there is no better example of a new build hot-bed than Winchburgh, where all the major builders continue to exploit an established location near to the city. The same can be said for Penicuik and Loanhead to the south, and a pattern of new build activity following the A1 motorway to the east, through to Haddington.
In Scotland new build properties can be an attractive option versus buying in the secondary open market, where buyers face the price-versus-value phenomenon, alongside the sometimes demoralising sealed bidding process, which is the selling method for the greater majority of second-hand properties. Furthermore, new build properties come with the comfort of a warranty and, let’s be honest here, with higher standards of insulation and energy efficiency, you could be forgiven for believing they are the better option for living in the Scottish climate!
So there are good reasons to have new build on your radar – we know this much; but don’t forget the mortgage! The reason I say this is because the new build purchase, mortgage process and product market differs (in varying degrees) from buying a second-hand property. In this guide I will make some handy pointers to assist you with becoming new-build ready. I also make the case for professional New Build Mortgage Advice in guiding you through the new build "maze".
1 – SEEK PROFESSIONAL NEW BUILD MORTGAGE ADVICE AND ARM YOURSELF WITH A DIP (DECISION IN PRINCIPLE) FROM A LENDER, IN CASE YOU NEED IT TO RESERVE A PROPERTY
Generally builders are flexible with their sales process, allowing a property to be reserved for a deposit as little as £100, but more often we see developers requiring a Mortgage DIP (Decision in Principle) before they will allow you to secure a property. This is understandable – builders need cash flow to fund their activities, and they want to know that a buyer has the means to follow through with their purchase. By consulting a whole-of-market mortgage advisor (that’s us, by the way!) and receiving professional New Build Mortgage Advice before you commence your new build property search, you can target the right lender for your circumstances and have a DIP certificate ready to present to a builder’s sales negotiator. This will prevent you suffering the disappointment of losing a property you are unable to reserve immediately. As part of our New Build Advice process, we ensure our clients are armed with a DIP early on, so they can search for a new build property with the confidence they have access to the required level of mortgage finance.
2 – LINE UP A SOLICITOR
Much like with obtaining a DIP, lining up a solicitor to act for your purchase will satisfy the builder that you are organised and committed to a purchase. Furthermore, your solicitor details will form part of the information on your reservation agreement, and is thus usually an essential requirement. Sometimes a builder will recommend one of “their solicitors”, but you need to carefully consider any potential COI (conflict of interest) in taking such a recommendation. It’s important not to forget that the builder is the “seller”, and they have interests in opposition to your own.
3 – IT’S IMPORTANT TO KNOW THAT MANY LENDERS RESTRICT BORROWING AGAINST NEW BUILD PROPERTIES - SEEK NEW BUILD MORTGAGE ADVICE TO FULLY UNDERSTAND THESE RESTRICTIONS
A common source of disappointment is the perception among buyers that access to borrowing is the same as with open-market properties. Unfortunately, this is not the case. Here are the ways lenders choose to restrict their lending on new build mortgages, and ultimately why you should gain new build mortgage advice to navigate these restrictions:
LOAN-TO-VALUE RESTRICTIONS
Generally a buyer needs a larger deposit to gain broad lender access to new build mortgages. A significant proportion of lenders do not participate in new build lending above 85% LTV (or 15% deposit) for houses and 80% LTV (or 20% deposit) for flats. Lending above these levels can mean you pay more interest from a reduced pool of lenders and mortgage products, and in some instances it may even mean you don’t have access to the right lender for your particular set of broader circumstances. As part of our New Build Mortgage Advice process, we ensure our clients target lenders who will be able to lend in accordance with the level of deposit available. This is particularly relevant if you have a low deposit.
DEVELOPMENT EXPOSURE RESTRICTIONS
Often overlooked are lender “exposure limits” to a new build development. To manage risk, lenders commonly set a limit on the number of homes they will grant a mortgage on within a particular new build development. Furthermore, we have seen lenders refuse to grant mortgages on “quirkier” developments they don’t have the appetite for. This has been evident in Edinburgh’s refurbished flats market. As part of our New Build Mortgage Advice process, we will assist you in navigating any lender exposure restrictions that have the potential to cause disappointment.
The above highlights how New Build Mortgage Advice from a whole-of-market mortgage broker can be invaluable in saving the time and frustration that can arise from going-it-alone. As an experienced New Build Mortgage Advice firm we know (or at least know how to find out) the lending restrictions applied by individual lenders, making the mortgage journey a significantly smoother one.
4 – BEFORE YOU RESERVE A PROPERTY, THINK CAREFULLY ABOUT RECURRING COSTS
It’s really important when looking at a new build property not to get caught up in the aesthetics (although I accept it can be really exciting!) to the extent that you don’t take full account of recurring costs that will exist when you move in:
SERVICE CHARGES / FACTOR FEES
Most new build developments will have annual service charges/factors fees payable on an annual, quarterly, or monthly basis, for the maintenance of common areas. The builder will provide information on what the charge will be, so you can factor it in to your monthly budget. And don’t forget, this cost will likely never go away, and you can expect it to increase with time.
GROUND RENT (NOT APPLICABLE IN SCOTLAND)
Legislation in England and Wales surrounding leasehold ground rent is currently undergoing major reform (thankfully), with the effect of the Leasehold Reform bill ultimately disallowing ground rent on new residential leases. Before new legislation comes in to effect, the terms of any ground rent must be fully understood should you be purchasing a leasehold property.
In both cases, your mortgage lender will seek to factor recurring costs in to their affordability criteria, so it’s important they are taken in to account early in the process, and declared on any mortgage application. As part of our New Build Mortgage Advice process, we will do this for you, ensuring that the information provided in the mortgage application matches that of the UKF Disclosure Form provided to the lender's surveyor by the builder (see point 6 below to learn about the UKF Disclosure Form).
5 – BEAR IN MIND THAT YOU MAY NEED A MORTGAGE OFFER WITH AN EXTENDED EXPIRY DATE - SEEK NEW BUILD MORTGAGE ADVICE TO MANAGE MORTGAGE EXPIRY RISKS
On reserving your new build property, the developer will set a time limit for you to conclude missives (the legal equivalent of exchanging contracts in England) and pay a deposit. The time limit and deposit depends on the terms stated by the builder, but in my experience time limits tend to be 28 days, with deposit levels ranging from £2,000 to 5% of the purchase price. But what about the mortgage? This needs to be in place by the time you conclude missives, yet the property may take a further 6 to 12 months to be built. This can be problematic because, as standard, mortgage offers expire 6 months after they are issued, so there is a real risk a mortgage is no longer valid at the point the property is finished and you are ready to complete the purchase. Obviously, this situation must be avoided, and can be managed in the follow ways:
TARGET MORTGAGE PRODUCTS WITH LONGER OFFER PERIODS
Some lenders have specialist new build mortgage products with 12 month offer periods, giving ample time for your property to be built and the purchase completed. This, however, has the potential to restrict your mortgage product options, and maybe even increase your borrowing costs versus standard mortgages.
TARGET LENDERS WHO COMMIT TO EXTENDING A MORTGAGE OFFER
A contingent of lenders commit to extending mortgage offers on new build properties when more time is required for the property to be finished. A mortgage advisor plays an important role in knowing who these lenders are, and how to obtain an offer extension, if required.
NEGOTIATE AN EXTENSION TO THE RESERVATION PERIOD WITH THE BUILDER
Sometimes it is possible to negotiate an extension to the reservation period, which in turn allows you to delay a mortgage application to the extent that the mortgage offer would have an expiry date that exceeds the build completion date of the property. A mortgage advisor can play an important role in such a negotiation, providing reassurance to the developer that the mortgage will be obtainable.
Again, I make the case for arranging your mortgage through a whole-of-market mortgage advisor. As part of our New Build Mortgage Advice service, we will assist with the right strategy in ensuring you have a valid, unexpired mortgage offer at the point you complete your purchase and the mortgage funds are required.
6 – YOUR MORTGAGE LENDER WILL HAVE YOUR NEW BUILD PROPERTY VALUED
Mortgage lenders want to be sure of the value of any property they lend on, and new build properties are no exception to this rule. If your property is partially built, or construction hasn’t commenced, the lender’s surveyor will value it “off-plan”. This usually means an appointed RICS surveyor will visit the site of the build to assess the project and view the plans for both the entire development area as well as your particular property. They will also request provision of the compulsory “UK Finance Disclosure Form” from the builder, which makes mandatory declarations to the lender about the property specifications, incentives, and other related matters. You can Click Here (pdf opens in new window) to see a copy of the form the builder must complete and provide. In recent years, particularly in Edinburgh and surrounding areas, we have not experienced many cases where a surveyor has disagreed with a builder’s price, but that’s not to say it can’t happen. As part of our New Build Mortgage Advice process, we take on the important role in coordinating the valuation, and providing guidance on any valuation related issues.
7 – ANY BUILDER CASH INCENTIVES MUST BE TREATED CAREFULLY
It is not uncommon for a builder to offer a cash incentive to woo prospective buyers, such as paying the stamp duty or offering cash back. Generally, lenders cap cash incentives to 5% of the purchase price, with amounts above this either restricting the number of lenders you might have access to, or requiring particular treatment. Some lenders, for example, will allow cash incentives to exceed 5%, but on the proviso that any excess is deducted from the loan amount. Again, as with most of my points, I make the case for a good mortgage advisor to assist you. As part of our New Build Mortgage Advice process, we will guide you on the implications of builder incentives, ensuring the mortgage application is configured correctly when we submit it on your behalf.
TO CONCLUDE
The finer complexities of buying a new build property mean that obtaining the right mortgage for your circumstances is a more complicated affair. In my view, this is where a good mortgage advisor is very much “worth their salt”, giving you the benefit of their awareness of both the purchase process and lender criteria. As a whole-of-market mortgage broker, we are positioned to give you impartial New Build Mortgage Advice that could save you time, money, and stress.
CAN WE HELP YOU WITH NEW BUILD MORTGAGE ADVICE?
We can’t guarantee we can help you obtain a new build mortgage, but the only way to find out is to call us for a friendly chat or appointment. If you would like to speak with me personally, just ask for Dan McLardy. I would be delighted to assist you.
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YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
