New build homes
The UK is building more new build homes than at any time in the last five years according to the National House Building Council. As these new build homes come onto the market, the number of borrowers seeking advice on mortgages for new build property is set to keep rising.
The increase in construction has been encouraged by the government’s Help to Buy scheme, currently operating in England and Scotland, and the additional routes it provides for buying new build homes with a deposit as low as 5%. But despite benefits like low maintenance homes, warranties, cheaper running costs through energy efficiency and the absence of an ongoing chain, new build homes also demand that borrowers approach them with eyes fully open to potential complications.
Here are some key considerations that new build borrowers should be aware of:
New build homes are like new cars
The price that a borrower pays for new build homes includes a new build premium that tends to disappear the moment they move in. As with a new vehicle being driven off a garage forecourt, the initial movement in a new build home’s value could be downwards. It’s important that any borrower’s future plans aren’t dependent on increases in their new home’s value in the first few years.
Many borrowers will accept ongoing construction around them as the price they pay for moving into a newly built property. But they must also bear in mind the impact of other new build properties coming onto the market. If site development will go on for several years, they could be competing against brand new properties when trying to sell their home.
Don’t be incentive led
With the new build premium in mind, it’s important that borrowers look beyond the headline value of their new home and focus on the amount that they are actually paying for it, and that any future buyers might be prepared to pay. Many developers use price incentives to encourage sales, but these can distort the true value of a property and leave owners more vulnerable to future house price changes than they realise.
Allow for shared equity fees and repayments
Help to Buy offers shared equity schemes specifically for new build homes. But borrowers need to plan for any future fees they may need to pay on the equity loan, as well as the requirement to pay the loan back. In Scotland, the shared equity loans available under Help to Buy are interest and fee free, but in England borrowers must pay monthly fees from the sixth year onwards.
These are calculated at an annual rate of 1.75% but then increase by 1% above the Retail Prices Index each year. Although there are some controls in place, fee payments could add up to significant amounts in the longer term, and borrowers need to be aware of the potential for them to rise.
They also need to understand that the amount due when repaying an equity loan is based on the percentage value of the property that the loan originally represented, not the cash amount of the loan itself. If the house is sold, and an equity loan of 20% is outstanding, then the government receives 20% of the sale price, which could be more or less than the initial loan amount.
If borrowers choose to repay the loan early, either through their own savings or by remortgaging, then the repayment amount will be decided by an independent valuation of the property.
Post courtesy of Nationwide Building Society.