With so much regeneration going on in the Northern cities like Nottingham, Liverpool, Birmingham and Manchester, we are seeing an increase in the demand for buy-to-let mortgage applications for these new builds, and in particular for new build flats.
Whilst these developments often advertise above average rental yields and attractive incentives such as paying your stamp duty or furnishing the property, the mortgage process is more complex and there a number of important factors you need to consider when weighing up the pros and cons of buying a new build.
Read on to find out more or click a jump link below to skip to a chapter that interests you.
- Reservation Fee
- Mortgage Offer
- Is the Development Suitable For a Mortgage?
- Developer Freebies
- New Build Warranties
- Why Use a Broker?
What surprises our clients is the increased deposit you will need to find for a new build, especially if you are purchasing an investment flat.
Lenders do have different criteria on this, but you can expect to pay between 30-35% deposit for a buy-to-let flat and 25-35% for a buy-to-let house.
This is to protect them against the inevitable devaluation within the first few years.
If you are purchasing the property to live in, then the lenders are more generous and you can expect to put down 15-20% deposit.
You may also be eligible for the government help-to-buy equity loan scheme.
They will loan you up to 20% of the property value, so you’ll only need a 5% cash deposit, and a 75% mortgage.
In order to secure your property, you will need to pay a reservation fee to the developer.
Once reserved you may then have a strict deadline of 4 weeks in order to exchange contracts (this is when you are legally bound to purchase the property).
There can be many months between exchange of contracts and completion, depending on how far along the build is when you reserve a property.
It's vital to have a mortgage offer in place before you exchange contracts.
Many lenders are aware of the tight deadlines imposed by developers and will usually have a specific new build team who will prioritise these applications, to ensure a speedy offer.
Another concern is that most mortgage offers are only valid for 6 months.
It's highly likely that the build will be delayed or in fact the property is not due to be completed until after this offer expires.
Lenders have therefore put in place an extension of the offer, by up to 6 months, therefore actually giving a 12-month mortgage offer.
It's important to be aware that any extension of the original offer will need to be applied for within 3 weeks of it expiring, and the underwriter will need to agree to this.
Is the Development Suitable For a Mortgage?
The lenders will usually have a limit as to how many properties they will lend on in a new development, and will not generally exceed 25%, in order to spread their risk.
The first question a broker should ask is - can the lender still lend on this property?
There have also been instances where the lenders have become wary of lending on new build flats in areas where there are few owner-occupied properties.
They are deemed higher risk of remaining empty for long periods due to the surrounding competition.
In order to make a developer's property more competitive, they will usually offer an incentive to the purchaser.
The lender is generally accepting of these incentives, but they also set limits.
If the incentive exceeds 5% of the purchase price, then they will reduce the purchase price by the amount it exceeds the 5%.
For example, if a purchase price is £200,000 and there is an incentive value of £12,000 (6%) the lender will reduce the purchase price by £2,000.
They will then lend against this lower value.
New Build Warranties
Depending on the lender, a new build warranty will have to be in place for a minimum of 10 years.
The new build warranty will need to be on the lenders acceptable list (and these can differ from lender to lender).
Part of the duty of the solicitor is to make sure the warranty is acceptable to the lender, but to save time the mortgage adviser should also be looking at this when searching for suitable lenders.
Why Use a Broker?
If you are considering a new build mortgage, then it's a good idea to engage the help of an experienced broker.
Added to the complexity of a new build mortgage, is the seafarer element.
As industry specialists we can navigate all the obstacles involved and get you a successful outcome as quickly as possible!
Contact us today for a free initial consultation.
IMPORTANT: This article provides an overview of buying a new build investment property in the UK. It does not constitute advice and should not be used to make financial decisions. You must always seek advice from independent financial specialists when making major financial decisions.