New Build Mortgages

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New Build Mortgages

New Build Mortgages Frequently Asked Questions

Richard Campo from Rose Capital joins us to talk to us about new build mortgages.

What is the new build mortgage process?

There are some quite key differences when you’re buying a new build property. One is around the timing of the process, which we will come on to shortly, and the second one is related to something called a CML form which concerns any incentives around the property. 

The new build market generally has a negative reputation in some ways. In the runup to the financial crisis in 2007 there was a lot of activity going on in new builds that shouldn’t have been – especially regarding incentives. (These days there’s no issue with build quality. The property will be absolutely fine. ) there was never a concern about the build quality, but in some instances there was not enough clarity around the true value of the property from a lending perspective

Back in the 2000s there were some not great practices in some instances. Imagine a new property was worth £100,000; some developers were offering to pay the stamp duty, offering cash backs and other incentives… but rolling that into the purchase price. So the £100,000 became £115,000 on the books. At the time some banks were doing 100% (+) mortgages – so you could conceivably have a mortgage for £115,000 but the property wasn’t worth that. 

Prices then fell in the wake of the crash – so with that example, a bank could be left with a property worth £75,000 with a mortgage of £115,000. That was a very big issue for the lenders. That’s why there are some better practices that have been introduced today on a new build mortgage.

How long does the new build mortgage application process take?

The earliest stage you can agree a sale on New Build is ‘off plan’, so well ahead of anything actually being built – you could be three or four years away from the scheme completing. That off-plan stage is potentially a bit risky, but it can also work well if house prices are going up and you agree on a price early on. 

At that point you can’t get a mortgage. You can’t hold onto a mortgage offer for more than 12 months. But some providers will let a mortgage offer run for 12 months and some banks also have special new build products. 

Just be careful when looking at potential mortgage deals, as not all the lenders products apply specifically to New Build or allow a longer term offer. This can be confusing so speak to an advisor who is familiar with this process. Once you get to six months out from expected completion, the whole market comes into play and you can get a regular mortgage at that point. 

So, depending on your risk appetite and when you want to get involved, you can look to get a mortgage around nine to 12 months out. 

What deposit do I need and how much can I borrow?

It’s pretty much the same as with most mortgages. The smallest deposit you can get away with is 5% – although the type of property is important. Some New build flats can be dealt with differently from new build houses. 

For a flat you might need a slightly larger deposit, depending on the bank. Some banks will accept just 5%, others might want a 15% to 25% deposit. If it’s a house, that’s less of an issue – generally you can get away with a 5% deposit. 

In terms of borrowing, the higher your deposit, the more you can borrow. With a 5% deposit most banks will offer you about four and a half times your income. If you’re putting down a 15% to 25% deposit some banks will offer five or even five and a half times your income. 

One thing to bear in mind, because we’re talking about this in October 2022, is that the financial climate is leading a lot of banks to change their affordability models. Interest rates are going to go up faster and higher than predicted. Banks apply something called a stress test to check you can afford your payments if interest rates increase in the future. 

Two weeks ago we thought the base rate was going to top out about 4% in 2023 – but that could easily be 6% now. Banks may start to check whether you still afford this mortgage at 6%, which will mean some people can borrow less, particularly if you have children or debts. 

I urge you to get in touch with a broker quickly, because the world’s changing and it’s really important you get the right outcome. There’s more risk with a new build. In a regular purchase you could walk away – you just lose survey costs and legal fees. But with a new build you may have large reservation fees or large deposits. There’s a lot on the line that you do not want to be risking.

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Are there any incentives available on a new build?

A lot of developers do offer some incentives. It depends on the market. When the market is very strong developers might just say ‘that’s the price, take it or leave it.’ If the market’s a bit softer, some developers will give you some cash back, pay some stamp duty or throw in some furnishings or fixtures. 

After the financial crisis a CML disclosure form was brought in that must be completed for all lenders. CML stands for Council of Mortgage Lenders. It’s a code of conduct that all mortgage lenders sign up to make sure mortgage standards are held very high. 

If the incentives are worth more than 5% of the purchase price your mortgage application is flatly declined. If you buy cash it might be different. In recent years the market has been strong, so that level of incentive is unlikely. 

What help or schemes are available on new build properties?

The Help to Buy Scheme is winding up at the end of October so I won’t expand on that in any great detail, but I suspect some developers will be offering similar things. It’s an equity share in the property, which is different from a loan. 

How it works today if you’re in London is that you get up to a 40% deposit from the government. This is limited to 20% outside of London. It might be that the developers step in to do the same. If you’re buying a £100,000 property, you would receive £20,000 as a 20% deposit. If the property value doubles, that amount becomes £40,000 – because it’s an equity share. So you could have to pay back more in the long run.

Another scheme that’s been running for a long time now is Shared Ownership. It’s offered by housing associations and allows you to buy anywhere between 25% to 50% of a property on day one, and rent the remainder. You have to factor in not just the mortgage payment but also the rent. I’m a big fan of shared ownership because you can do something called staircasing, which lets you buy extra chunks of the property over time, until you own the whole thing outright. 

In the new build world there can often be family help, and we commonly see something called Joint Borrower Sole Proprietor, which is effectively a guarantor mortgage. This is where parents or siblings, if they have a very strong income, can come on a mortgage and help you buy. They’re not named on the property, so there are no stamp duty or tax issues. It’s a great way of helping people get into the market. 

What are the pros and cons of new build mortgages?

A lot of it is down to preference. Some people just don’t like new builds, some people really love them. Aside from that, a big pro is that most new homes are very energy efficient and many mortgage providers offer green mortgages. If you get an A or B efficiency rating on the property you will gain a discount on mortgage rates of around 0.1% or they might waive the application fee which could save up to £1000.

You also often get a 10 year guarantee which is really good if you buy a home and something major goes wrong. You can also have some input into the build configuration and you often get to choose carpets, tiles, kitchen units and things like that. 

On the less positive side there’s the historical reputation element that we touched on earlier, which means some people have a slight negative perception of new builds. I also think more could be done to help borrowers secure mortgages earlier, or speed up the process. 

Also, as a country we’re not on board with modern construction methods – there’s lots of ways to build new homes that are quicker, cheaper and more energy efficient and just as long-lasting… but banks won’t lend on them. That’s a real shame. I really hope that the new build market will trigger some of these construction methods because there are great ways of building cheaper, great homes which are really needed.

How can a mortgage broker like Rose Capital help?

New build mortgages can be complicated. There’s the timing, the type of property, the construction, even the type of developer – these are all mortgage factors. A broker is worth their weight in gold because we can very quickly get you what you need. 

We will help you get a mortgage secured as early as possible to give you peace of mind. Plus, brokers get a lot of exclusive rates, much better terms and sometimes better criteria. We work with providers where we can get mortgage offers for 12 months, not six, which really helps. 

So if you want the best outcome and don’t want to spend hours and hours googling, please talk to a broker. We’ll make the process a lot easier and ultimately get you the right outcome, which is what it’s all about.

Your property may be repossessed if you do not keep up with your mortgage repayments. 

There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical amount is £495.