Author: Satnam Sidhu, Mortgage Expert at Haysto
Buying a new property? Or thinking about it? Here’s what you need to know (and what to watch out for) when getting a new build mortgage.
How are new build mortgages different?
In essence, mortgages for new builds aren’t hugely different from ones for older homes. But the process can be more tricky, especially if your home is still being built.
Timeframe
Most mortgage offers stay valid for six months, so if your home hasn’t been built yet then it could make things difficult if there’s delays with construction. Some lenders can extend this offer period, but you’ll usually need your application to be reassessed. It’s a common scenario, but something to be aware of. Some lenders offer specialist mortgages for new builds with an extended validity from offer to completion.
How much you can borrow
Because of previously artificially-inflated purchase prices, some lenders are cautious when it comes to how much they’re prepared to let you borrow on a new build. If you’re not going through a scheme such as Help to Buy or Shared Ownership, then you might need a bigger deposit than you would with an older home.
All mortgage lenders do things differently, so it’s best to do your research before applying, and get independent advice.
What schemes can help you buy a new build?
If you’re looking for a brand new home but need a leg-up on the ladder, the following schemes can help you get one.
Help to Buy
What is Help to Buy?
Help to Buy is a government scheme for first time buyers. It enables you to get on the property ladder with a 5% deposit. The government gives you an equity loan to put towards the cost of a new-build home.
The loan ranges from 5-20% of the property value (40% in London), and you’ll need to purchase your home from a registered Help to Buy homebuilder. The current scheme runs until March 2023 and is available to first time buyers in England only.
Interest on your equity loan will start after five years, and you can repay some or all of your equity loan at any time. The amount of equity loan you pay back will be worked out as a percentage of what your home is worth at the time. If the price of your home has gone up, then so will the loan amount you’ll need to pay. If the value has fallen, the amount you’ll pay on the loan will too.
Help to Buy pros and cons
Pros
- You don’t need a big deposit.
- LTV is lower so you can get a better mortgage rate.
- There’s no interest on the equity loan for five years.
- After five years you’ll pay a competitive rate of 1.75% on your loan.
- Repay your loan when you like.
Cons
- Your loan is a percentage of your home’s value, so the amount you’ll pay back can go up as well as down.
- Not all lenders offer Help to Buy mortgages.
- Remortgaging can be difficult.
- You can only buy from a participating developer.
- You need permission to make improvements to your home, even though you own it.
Read more about the Help to Buy scheme on the official website.
Shared Ownership
What is Shared Ownership?
Shared Ownership (sometimes called Part Ownership) is where you buy part of a property and rent the rest. You take out a mortgage on the bit you’re buying, then pay a reduced rent on the bit you don’t own. You’re able to buy between 25-75% of the home, and can buy some or all of the remaining share later on when you can afford to.
Shared Ownership is only available for new-build homes and some existing properties via specific resale programmes from housing associations. They’re always leasehold, meaning you won’t own the land your property is built on and may have to pay ground rent and maintenance costs.
Shared Ownership mortgages help people who can’t afford 100% of the cost of a home to purchase a share of a property and rent the rest. It’s a good option if you’re struggling to save for a big deposit. You’ll generally put down between a deposit of 5-10% of the share you’re buying.
Shared Ownership pros and cons
Pros
- It’s one of the cheapest ways to get on the property ladder.
- Less money up front – you only need a small deposit for the share you’re buying.
- You can increase the share you own when you’re able to afford it.
Cons
- You’ll need to have the property valued before increasing your buyer’s share. If house prices have increased since you took out the mortgage, you could end up paying more than you would have at the start
- You’ll have to give the housing association first refusal if you decide to sell the property
- The homes are always leasehold, so you’ll be liable to pay any ground rent or service charges in full (no matter what percentage of the property you actually own)
Read more about Shared Ownership on the official website.
Mortgage Guarantee scheme
What is the Mortgage Guarantee scheme?
The Mortgage Guarantee scheme is a government-backed scheme where you can get a mortgage with just 5% deposit. Unlike Help to Buy, you aren’t restricted to brand new homes, but it allows first time buyers, home movers and previous homeowners to get a 95% loan-to-value (LTV) mortgage.
When the pandemic started, 95% mortgages disappeared from the market, leaving lots of potential homeowners stuck paying high rents. The idea behind the scheme is to encourage mortgage lenders to bring these more accessible mortgages back to the market.
The 95% mortgages work just the same as any other mortgage – the experience won’t be any different for you as a buyer. The difference happens on the lender’s side. The scheme guarantees that the government will take on some of the cost if the lender loses money after giving you a mortgage. E.g. if you were repossessed or your home decreased in value. The scheme runs until December 2022.
Mortgage Guarantee Scheme pros and cons
Pros
- It works just the same as a regular mortgage.
- You don’t have to be a first time buyer – the scheme is open to home movers and people who’ve owned property in the past.
- You’re not restricted to buying a new build home – giving you a wider choice of properties if you decide a new build isn’t for you
Cons
- The scheme is still fairly new, so you won’t have as many lenders to choose from.
- If your situation is a bit more complex (bad credit history or self-employed) you might have limited options.
- With a smaller deposit, your loan will be bigger. So your monthly payments will be higher than if you had a larger deposit.
Read more about the Mortgage Guarantee Scheme on the official website.
Things to watch out for when buying a new build
When it comes to deciding whether to buy a new build, there’s a few extra things to watch out for compared to buying a pre-existing home.
The good stuff
Protection
New homes usually have warranties which protect you if something goes majorly wrong with the building. The National House Building Council offers 10-year certificates, giving you more peace of mind as a buyer.
Have it your way
A lot of developers let you choose your own fixtures and fittings, meaning you can have things like the kitchen, bathroom and carpets exactly how you want them – all ready for when you move in.
Chain-free
There’s no waiting for other people to buy and sell at the other end, so it can make the process quicker and easier.
Save on energy
New homes tend to be more energy-efficient than their older counterparts. Meaning money saved on gas and electricity bills.
The not-so-good stuff
The cost
The value of new build homes has historically been artificially inflated. This is known as the ‘new build premium’. You also might have to pay more up front, as developers usually ask you to pay a fee to reserve your home.
Delays
As we touched on earlier, if you’re buying off-plan, there’s always a chance of delays in construction, meaning completion happens later. Most mortgage offers are valid for six months, so if the clock runs down you risk needing to apply for a mortgage all over again.
Gatekeeping by developers
There’s increasing reports of developers not allowing people to reserve or even view properties unless they’ve been ‘assessed’ by their in-house mortgage brokers. As a buyer, you’re absolutely entitled to seek your own independent financial advice, and aren’t obliged to use the developer’s broker.
If you’re set on a particular property, you may have to ‘play the game’ and see their broker to bag a property, but it’s totally your right to work with an advisor of your choosing. Not all brokers are equally competent, and if you have a more complex situation (self-employed or bad credit history) then you might be wrongly told that you’re not eligible for a mortgage, when actually you just need specialist help.
Build quality
A lot of large developers value quantity over quality. Many buyers get drawn in by beautiful-looking homes that hide the reality of the build quality. When buying a new home, it’s best to get an independent professional snagging company (like New home quality control) to have a good look around your home, either before or after your purchase. A ‘snag’ is something that’s been done, but not correctly, and some snags might seem insignificant at first, but can cause further issues down the line. Got questions about snagging?
Get in touch with the New home quality control team.
Leasehold issues
Some leasehold properties have a hidden clause that allows your ground rent to double every decade . Most mortgage lenders won’t lend on any homes that have this clause, leaving loads of new build owners stuck with properties they can’t sell. If you’re buying a leasehold property, make sure you check the paperwork thoroughly beforehand.
The new build buying process
STEP 1: Find a good developer and a home that’s right for you
Not all developers are equal, and it’s best to do your research when deciding which developer to buy from. You’ll be bombarded with lots of shiny marketing brochures and gorgeous show homes, so make sure you get a detailed specification of the property you’ll be buying and a breakdown of all the costs involved.
STEP 2: Get a mortgage broker and a decision in principle
You don’t have to use the developer’s in-house broker to get a mortgage – you’re free to source independent financial advice. A Decision in Principle is a confirmation from a lender that they’re willing to lend you a certain amount of money to purchase a property. A mortgage broker can sort this for you fairly quickly, and it can help you get an indication about the size of mortgage you’re eligible for, which helps you to determine how much deposit you’re going to need and the options available.
STEP 3: Reserve your home
Once you’ve found the ideal home and sorted your finances, you’ll be asked to pay a fee to reserve the property. What you’ll be asked to pay depends on the developer, but it can be up to £2,000. Once you complete, this’ll be deducted from the overall price.
STEP 4: Appoint a solicitor
When large amounts of money are exchanged, you need a professional to handle the transaction. Your solicitor does this on your behalf, and protects you legally during the house-buying process. They also carry out searches on the property and update the Land Registry.
STEP 5: Secure your mortgage
Your mortgage broker will have been beavering away in the background to find the right mortgage deal for your needs. Once they’ve found you a mortgage, they’ll help you submit your application and deal with the lender. The mortgage lender will then work out how much you can afford to borrow, and carry out a valuation of the house you want to buy. If it hasn’t been built yet, they’ll work to the developer’s plans and specifications.
STEP 6: Pay the deposit and exchange
Time to part with the cash! If all the solicitor’s searches come back ok, then both your solicitor and the developer’s solicitor will draw up some contracts ready for you to sign, known as ‘exchanging contracts’. You can then set a completion date (the date you officially become the property owner) once you’ve exchanged. Remember, once you’ve exchanged contracts, you won’t be able to back out from the purchase without losing your deposit, so it’s important to make sure you’re 100% happy.
STEP 7: Get a snagging survey
Between exchange and completion is the perfect time to get a professional snagger to carry out a survey on your new home. The New home quality control team typically spends around four hours examining every part of the property and identifying issues that haven’t been completed to a satisfactory standard, such as defects with decoration, fixtures and fittings. The complete snagging report will then go to the developer who should fix any problems before you move in.
STEP 8: Complete!
It’s time to book the moving van and box up your things. Your completion date is the day you officially own the property and become a homeowner . The whole mortgage process from start to finish can be anywhere from around 6-8 weeks, but can sometimes take a lot longer. It all depends on how complex your situation is, and if there’s any hold-ups on the developer’s end.
Help with new build mortgages
If you’re looking for a mortgage on a new build, it’s a good idea to work with an independent mortgage broker. While you might feel pressured to use an estate agent’s in-house broker, they usually have the developer’s best interests in mind, rather than yours. So a quick sale can take priority over finding the right mortgage for you.
Buying a home is probably the biggest purchase that you’ll ever make, so it’s important to fully understand your options, get clear advice, and feel confident you’re getting the right mortgage for you. If you have any added complexity on top (bad credit or self-employed) then getting expert help is a no-brainer.Satnam is a Mortgage Expert at Haysto – an online mortgage broker that specialises in mortgages for people who don’t fit the traditional mould. Bad credit, self-employed, and the tricky stuff is all they do.
