Buying a new build? Things to consider..
Definition of a new Build property:
Any property built or first occupied within the last 2 years. Refurbished, majorly modernised or altered in appearance.
Things to consider when looking at new build properties:
Limited LTV’s – Some lenders will limit the lending amount (loan to value = LTV) on a new build property and this may differ depending on a new build flat or a new build house.
Max Exposure – If buying a new build flat, lenders will limit their exposure and limit the amount of units that they will lend on. For example if 100 units in a block the lender may only lend on 20% of the development – so lending on 20 units. So if you start your mortgage application late and the chosen lender has already hit their exposure limits then regardless of your circumstances they will decline the application.
Building warranties – all new developments will have a building warranty in place – NHBC is the most common, all banks have a list of accepted building warranties and your mortgage broker should check with your lender that the building warranty will be accepted by your potential lender. Accepted Building warranties can be found in the individual lenders CML (council of mortgage lenders) hand book.
All lenders will have a panel of lenders that they are happy to work with, please make sure that you have checked with your potential lender that they will accept your solicitor. If the lender does not accept your solicitor then you may need to change solicitors which can then cost more than anticipated.
Depending on the lender, you can ask for your solicitors to be added to the lenders panel, however this may slow up the process.
Commercial Underneath the property:
If commercial units are underneath your property (usually new build apartments) Please check the type of commercial usage of the retailer/office etc. Lenders may decline the property depending on the usage. For example – if there is a hot food take away retailer on the lower floor, this would be declined with most lenders.
Leasehold – Ground rent and service charges:
In recent years buyers have seen increasing ground rent and service charges. Some lenders will decline a new build if they feel the fees start high or if they double every 10 years. Your solicitor will have a duty of care to the buyer to check this and make sure there are reasonable charges.
Many banks will decline a development depending on how many units have been sold to end users (owner occupiers). Please make sure you are asking this question before purchasing a unit. This issue has been hot topic in the last 18 months and a change in the lending industry. Many lenders will not lend if less than 30% is sold to owner occupiers.
Once you have exchanged contracts you are legally obliged to complete. In recent years many surveyors have taken a cautious view on valuing a new build property and quite often will only use comparable from similar types of already sold and completed properties. If a property is down valued you will only be able to obtain your loan to value on the valued price so may find there is a short fall to the purchase price. Please make sure you are not using all of your accessible savings to purchase the property.
Buy to Let – Rental Guarantee and other incentives:
Although a rental guarantee may seem a good incentive from the developer, most lenders will not take into consideration the rental guarantee and will only use the comparable market rent that could be achieved.
-Property related fixtures
-Discounted purchase price
-Stamp duty paid
If the total of the incentive is more than 5% of the total purchase price then some lenders will decline lending altogether.
Your circumstances change from when you exchanged contracts:
Some clients find that they may have exchanged contracts on a new build property a few years before completion date and their circumstances have changed for the worse when applying for the mortgage finance at completion.
If you find yourself in this position, firstly speak to your solicitor as they can check your contract and to see if the contract is assignable.
If your contract is assignable you may:
• Sell the property before completion.
• Add a friend, family or colleague to the property purchase however, please make sure you are checking with lenders that by adding another party you will then be able to obtain finance for completion.
• By using a mortgage broker they will be able to check across different lenders to make sure that your new found circumstances can obtain lending. If all lenders are declining you as a borrower then you may have to look at bridging loans or alternative lending.
If the contract is not assignable:
• Seek alternative lending for short term and sell the property once completion has taken place – however please make sure you have fully understood the overall costs of lending and any early repayment penalties have been taken into consideration.
• You may lose your initial deposit if you cannot complete
• failure to complete – you could be liable for costs to the developer – please ask your solicitor to clarify.
Top Tips When Buying a New Build Property
1. Speak to a market expert before deciding on a property, take into consideration, what’s going on in the area.
2. If you are buying a property to rent out – please make sure that you can afford to pay the mortgage payments if the property was not rented out at any point.
3. Make sure you do not over stretch yourself with lending.
4. Before exchange of contracts, check that you would be accepted with a lender. Lenders can only confirm that you fit current criteria. Lenders criteria can change at any point without prior notice.
5. If building a new build property, start your mortgage application early – recommended 6 months before completion date. This will reduce the risk of the lender declining your application due to exposure limits mentioned above.
6. Do not deviate from the requested paperwork requested by the lender – doing so will slow your application down.
7. Check usage of commercial units underneath your property (usually apartments).
8. Owner occupiers – check that the developer has allocated a certain % to end users.
9. Your solicitor should check that your mortgage offer will not expiry before completion date. However always make sure that you are double checking.
10. Check the Short stop date – this is the earliest a building is expected to be completed – make sure this fits in with your plans.
11. Check the long stop date – Delayed completion – if the developer fails to complete the property you may be entitled to withdraw from the purchase without penalties.
In All cases – Please see independent legal advice before purchasing a property.