The first is whether the style and construction of the building will provide security for a lender or not.
The second is that if there are constraints on who can buy the property then the lender has the additional problem about whether they can recover the funds in the event of repossession of the property.
Andrew Montlake, partner at broker Cobalt Capital, says the big issue is whether or not such properties can actually be financed, and there is a big difference between theory and practice.
He said: “I suspect that many lenders will actually shy away from lending on these properties until they fully understand the risks involved in buying one – and the valuer’s words will be crucial,” he says. “It will also depend on whether or not these homes keep their value and what the prospects of selling them on are. Very simply, lenders do not want to be stuck with a property that is hard to sell in the event of repossession.”
LiveSmart@Home states that the homes are for owner occupation only and will be available primarily to people who do not already own their home. However it does point out one or two possible exceptions, for instance, if someone applies for a home following a relationship breakdown and their home is being sold. Demand in Gateshead is expected to be high and the application process will involve filling in a form, followed by an interview to determine financial circumstances. Applicants are likely to be called in for interview and a lottery eventually held to decide who gets the homes.
However, with the exact wording on the covenant regarding re-sale still to be confirmed and circulated to lenders, it is this issue – as well as the properties’ structure – that is likely to be the sticking point when it comes to first-time buyers getting a mortgage for their purchase.
Katie Tucker, technical manager at John Charcol, says IKEA would be well advised to team up with a lender and offer its own mortgage product – something the store has not done so far.
She says: “Few lenders currently consider timber-framed properties as they are not considered as durable as traditional brick. Additionally, the unprecedented re-sale market for them in the future, added to the stipulation IKEA vets and prospective buyers, means that lenders would have trouble selling the property on, so would probably refuse to mortgage, or, would down-value it considerably, meaning that the buyers could have to stump up a large deposit. Also, if IKEA is planning on restricting the price in the future, this lack of inflation will also concern a lender.”
However LiveSmart@Home reckons the covenant is in the lenders’ favour. “Essentially we are saying we will buy back and sell on to people who meet the criteria – so it is not as if we are restricting people to selling to a select group of people – we are offering a guaranteed sale back to us with an agreed valuation mechanism,” says John Hanson, operations director at LiveSmart@Home.
Sceptical
But brokers reckon the explanation so far is still too vague for lenders who are reluctant to commit to lending on the properties until they have more firm details.
“If there is a guaranteed buy-back, lenders would not have an issue with that so any of them who would allow the timber construction would be able to offer a mortgage on the property, as long as the properties are always subject to free market value,” says Tucker. “Which is why the ‘agreed valuation mechanism’ concerns me. How exactly does it mean to apply one? A set percentage? And why not market value?”
Some sceptics have already gone as far as branding the flat-pack homes as ‘unmortgageable’. Paul Holmes, editor at first-time buyers’ website FirstRung, says the properties are a ‘Legoland’ solution and blames the government for not assisting house builders more in the past.
He reckons the solution is unlikely to succeed as the properties will cost more than others in the Gateshead area and because mortgage lenders will not lend on the properties. He has a point about comparative prices; a quick search on propertyfinder.com reveals a plethora of one and two-bed properties in Gateshead for around or under the £80,000 mark and three-bed houses can be picked up from about £100,000.
“The mortgage lenders FirstRung deal with would not provide a mortgage on such temporary buildings,” says Holmes. “You’d have to apply for a short-term loan similar to buying a mobile home, on increased borrowing rates with a huge deposit. This highlights just how badly thought through the whole process is.”
Generally, for the scheme to succeed, it is essential that developments such as the one in Gateshead have the backing of the mortgage industry and are compatible with lenders’ criteria. New housing designs are all well and good, but if potential home owners cannot get the finance to buy them, then their success will be very limited. Page 3
