In general, securing a mortgage for a new build property follows many of the same processes as purchasing any type of property. However, there are some specific differences and challenges you should be aware of when you embark on your journey. Mortgage lenders do treat applications for new build properties differently and apply different criteria.
The definition of a new build property may differ with individual lenders. Generally speaking, the term covers any property built within the past two years, and not yet sold. If you buy a property which is still being built, or where work has not yet begun on site, this is known as ‘buying off plan’.
With off plan, you agree to buy your home before it’s finished, or even before work has begun. You put down a deposit – often a small sum – and then usually have the benefit of being able to specify fixtures and fittings, and even in some cases, furnishings.
Buying off plan is not usually a problem for mortgage lenders. It’s a common scenario in the housing market. However, new build mortgage lenders will not be prepared to release mortgage funds until all building work is complete.
If delays occur during the building phase – which they often do with new build properties – then it is possible that your mortgage offer term may expire before the property is completed, which will necessitate the need for an offer extension being granted by the lender.
Benefits of a new build property to the buyer
There are many advantages to buying a new build home – here are just a few.
- It really is brand new. Everything is exactly as you expect it to be, with no hidden horrors in terms of potential costly renovations and maintenance costs.
- You have real choices in terms of position and aspect.
- Your new property will almost certainly have been designed and built with modern living in mind, including open plan living areas, easy access to outdoor space and parking.
- You won’t get caught up in a property chain (unless you’re selling at the same time, in which case the fact that you aren’t in a buying chain can be attractive to your buyers).
- You will probably be able to specify your own choice of fixtures and fittings.
- You have real peace of mind in the shape of a 10 year NHBC (or similar) building warranty to cover any structural defects arising.
- You are buying as a business transaction – many house sales fall through because of sellers changing their minds or circumstances, which is unlikely to happen with a professional housebuilder, who must comply with the House Builders’ Code of Conduct.
- New build properties are designed to be more energy efficient, with the benefits of lower energy costs and reduced environmental impacts.
Potential drawbacks of a new build property
There can be some disadvantages too.
- New build homes can be more expensive than older properties.
- Delays in the build process can sometimes impact your moving plans, particularly development delays for off plan properties.
- Lenders usually demand higher deposits and are stricter on the amounts they are willing to lend, so it may be more difficult to secure a mortgage.
- If you’re buying off plan, you will have to pay a reservation fee on the property, which you will likely lose if you change your mind.
- New homes can be more difficult to sell on if you need to move up or down the property ladder.
- Some mortgage companies may be conservative about the value of a new build property because of a lack of history on buying and selling, unlike with older properties.
The new build mortgage process
If you choose to buy a new build home, then it’s important to pay attention to the timing of your new build mortgage application. Most mortgage offers are valid for six months, so if there are any delays in your development, it’s possible your mortgage offer could expire. Equally, if you leave it too late, there could be other issues.
It is possible to secure an extended validity period if you become aware of delays, which is where Mortgage360 can help, avoiding having to reapply for a new mortgage, potentially at a higher interest rate.
Additionally, some developers will give you a timeframe in which to exchange contracts and complete your purchase – this will differ from developer to developer. Arranging your mortgage in plenty of time means this will not be a problem.
As a guideline, the process for buying a new build should work as follows.
- Check your affordability – Mortgage360 can help with this
- Then you can begin your home search, knowing what your affordability ceiling is
- Pay your reservation fee to the developer
- Apply for a new build mortgage – work with your mortgage broker to select the appropriate mortgage type. You may be able to benefit from government schemes here, and Mortgage360 can advise accordingly
- Your mortgage broker will also check that your developer’s new build warranty is recognised by your lender during the application process
- Secure your mortgage offer
- Begin the legal process by appointing a conveyancer
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What are the eligibility criteria?
– Your deposit
It is not unusual for the value of new builds to fall a little when they are occupied, so mortgage lenders usually require larger deposits on new build homes. Expect your deposit to be at least 5% to 10% of the value of the property, with some lenders even looking for as much as 15%.
– Other typical eligibility implications
Most lenders base their decisions on how much they’re willing to lend on a multiple of 4 to 4.5 times of the applicant’s annual income, subject to overall affordability.
Your personal circumstances are important. Earnings and expenditure are scrutinised closely; stronger applications can demonstrate they live within their means. Your DTI (Debt to Income) ratio will also be assessed.
Your credit history – positive credit history is an important factor, although it’s not impossible to get a new build mortgage even with bad credit.
A mortgage lender will definitely be stricter with new build mortgage applications, which are carefully scrutinised by underwriters. If you’re looking for support with a new build mortgage, Mortgage360 can help.
When should you apply for a new build property mortgage?
It’s never too soon to look at an agreement in principle through your mortgage broker, but it’s best to make your application as soon as you find your new build home and pay your reservation fee. Developers may well apply deadlines on how quickly they need you to complete, so make sure you have your plans in place.
Contact Mortgage360 as soon as you’ve paid your reservation fee. You may have to advise when applying about any new build developer incentives being offered such as payment of stamp duty or legal fees, or even cashback, and these can impact on which lenders are willing to assist you.
FAQ’s
Developers can often work to demanding timescales and once you’ve reserved a plot, you may have only 28 days to exchange. That can be a challenge when it comes to getting a new build mortgage because some lenders may struggle to complete your application within that time frame. The best way to counter this is to prepare so that you increase your chances of making a successful mortgage application, and start the mortgage process as soon as you can. At Mortgage360, we are experts when it comes to new builds, we’ll work hard to get things moving as fast as possible.
Mortgage lenders are often stricter on the amount they are willing to lend on the purchase of new builds. This is to protect themselves from the inevitable devaluation of the property in the early years.
For example, a new build house would generally require a deposit of 15%, and this increases to 25% for a new build flat. However, some lenders can consider just a 5% deposit, if you buy through the Deposit Unlock scheme. Speak with an expert at Mortgage360 to find out more.
Buying a new build off-plan (before it’s built) is common. But it’s worth considering how long your mortgage offer is valid for, and when the property will be completed. Most mortgage offers are valid for 6 months but often can be extended. Some can be valid for up to 12 months.
Mortgage lenders will take account of any developer incentives when considering your mortgage. In particular, lenders are sensitive to any cash incentives, such as; deposit contributions, cash-backs, contributions to legal fees/stamp duty, mortgage subsidies etc. The key thing to remember is 5% – lenders are normally accepting of any incentive up to the value of 5% of the purchase price. Anything beyond 5% could impact how much you can borrow, or mean a lender could decline.
