Securing a mortgage for a client buying off-plan is still a tough call for many mortgage advisers and many have warned that unless lenders become more sympathetic it could get even tougher.
With the UK in the midst of a house building boom – the biggest since the Second World War – new build houses and flats are becoming a more popular option for all types of home buyers.
According to the Department for Communities and Local Government (DCLG), formerly the Office of the Deputy Prime Minister (ODPM), house building starts and completions were up 19 per cent in the first three months of 2006 compared to the same period in 2005.
Increasing demand
It is predicted that demand for new homes will increase over the next few decades – fuelled by the shortage of available homes as well as demographic developments such as the UK’s growing immigrant and elderly population and a considerable rise in one-person households.
The DCLG said between January and March 2006 there were 48,200 housing starts, up 19 per cent from the same period in 2005. There were also 37,600 housing completions, up 12 per cent on the same period in 2005.
During the year ending March 2006, there were 184,700 starts in England alone, up 6 per cent on the previous year, while completed residential properties rose 5 per cent to 63,300.
But while new builds are becoming an inevitable part of the property landscape, with plans to build a further 200,000 new homes in and around the Thames Gateway outside London, those wanting to buy a home are still having to jump through more financial hoops than those purchasing more traditional properties.
Paul Hearnden, managing director of My Mortgage Direct, admits more clients are looking at new build as a main property.
Hearnden says: “For many people a new build will be their only option, because available property in the area they want to buy is still in short supply. We are seeing a few more people buying new build as their main property, and they are prepared to wait while that property is being built rather than opt for something that’s already built but doesn’t quite fulfil their specifications.”
Demand may be there, but it’s certainly not matched in the choice of mortgages, claims Hearnden,
Many lenders steer clear of new build because of the unique qualities often needed by a client who may have months, if not a year before they move.
Hearnden says: “The major problem when a client comes to you wanting a mortgage for a new build property is being able to get them a loan that kicks in at a date that may be several months, even maybe a year in the future.”
The money market mechanisms, like swap rates, often will have end dates. This makes it tricky to get a client a two-year fixed rate that is guaranteed to expire in December 2008, if they are about to exchange contracts in August 2006.
“Being able to get a mortgage offer that takes into account the unique situation of a new build purchase is the biggest barrier,” Hearnden adds.
Lenders like Nationwide Building Society will offer a two-year fix that applies from the date of exchange. “Most other other lenders will start the clock ticking from the moment of the offer,” Hearnden says. For example, most lenders will offer a rate fixed until 31 September 2008 even if you only exchange in December 2006.
Lender understanding
Helen Pierson, principal at Stratford-upon-Avon-based Halcyon Mortgages, says Nationwide is one of the more understanding lenders.
“West Bromwich and Northern Rock will also extend their offers and there are some other lenders will offer a rolling end-date which takes effect years from the date of completion.
“In most cases they will keep this offer open for up to a year after the original offer, so as long as the property the client is buying is going to be built with a year they should be quite flexible.”
But with most lenders still reluctant to offer such flexible terms, it can be a challenge getting the best deal for a client, claims Hearnden.
“Because there aren’t many lenders who will be flexible, you can end up with a rate that might not be as good as a traditional property. Again, it depends on the lender. There’s a worry that you might not be treating the customer fairly,” he says.
Pierson argues this is why clients need to seek out specialist advice, and that advisers who do offer mortgages need to either swot up or be prepared to outsource the client to someone who has the relevant knowledge.
She says: “It is a much more specialist area than has been given credit for in the past. There are not that many lenders offering great deals, but there are some great lenders out there. It comes down to have a good knowledge of the market and being able to know which lenders offer longer expiry dates. The broker placing the mortgage needs to understand the market.”
Jumping through hoops
Expired mortgage offers are only one of several hoops an adviser trying to secure a new build mortgage will have to jump through.
Pierson says: “Valuations are, and have been, a major sticking point with new build developments because developers throw in quite a lot of added extras that will skew the price of the property.”
Pierson says these incentives include block discounts for buy-to-let investors, who may be purchasing several properties in one development; as well as 10 per cent deposits paid for first-time buyers, free legal fees as well as Stamp Duty tax paid.
“All of these can mask the value of the property, and there are plenty of cases where the mortgage lender will say the property has been overvalued,” she explains.
The fact that there are so many deals to be done has already led many lenders to withdraw from the buy-to-let new build market.
“There were too many discounts being given, so often properties were being overvalued. Buy-to-let new build has become a saturated market,” says Pierson.
“Too many new builds were bought at a discount and buying in bulk had reduced the price.”
Advisers need to be aware of the market forces driving developers, she adds.
“Builders have extremely tight deadlines and targets. A property selling for £100,000 looks better on the developer’s books than one priced at £95,000, so if they can offer a buy-to-let investor five per cent discount, or pay a first-time buyer’s 5 per cent deposit so much the better. The property still gets priced at £100,000.
“But when the mortgage lender comes in and downvalues it, then you start to get problems.”
Pierson says developers are often too stubborn about pricing. “
They are still trying to sell properties at a premium when the housing market is slowing. We’re seeing more down-valuations because builder are still trying to keep those prices higher.
“Look at it from the lender’s point of view. Something is priced at £100,000 and the buyer is getting £20,000 worth of incentives.
Mortgage lenders have to be cynical and wonder why all these deals are being offered.”
Valuations
Valuing a building that has not been built is an issue in itself, with different lenders approaching the process on a varying scale
Some lenders will carry out two valuations, an inspection of the site while it is being built, followed by a re-inspection when the building work is completed.
Hearnden says: “Most mortgage lenders will look at the plans and speak to the site manager during the initial inspection. It will give you a mortgage offer subject to a re-inspection, and as soon as the property is built it will visit it again.”
Pierson says many lenders she deals with will often only carry out one valuation which takes the form of the initial inspection. Most residential developers in the UK are regulated by the National House Building Council (NHBC), which will only issue completed property with an NHBC certificate if it conforms to certain safety and quality standards. The NHBC certficate is as good as a valuation for some lenders.
“They will carry out an inspection while the property is in the building stages and so long as an NHBC certificate is in place two weeks before the building is finished, no further valuation takes place,” Pierson states.
In fact some lenders don’t bother with one at all.
Rob Davies spokesman for Royal Bank of Scotland Intermediary Partners (RBS), says there is often no need for a valuation. He explains: “If a new build residential building has been granted the NHBC, it will have been constructed to the highest standards. So long as the property is under £400,000 and it has the NHBC certification, we don’t require a valuation.”
Even so, Pierson believes advisers can still play their part in making sure a client is not hoodwinked. She explains: “Builders can be quite underhanded about valuations. In a lot of cases lenders are not given the full picture and clients can get hoodwinked into the value of a property. If an adviser is local and knows of the development they will have an idea as to whether it’s being overvalued or not.”
But Davies says RBS is convinced that most new builds are a safe bet. “We allow gifted deposits – where the 5 per cent deposit is paid by the builder – but we might be more reluctant on other add-ons such as free furniture. But if a borrower is putting down 5 per cent of their own money, and the developer is putting down 5 per cent as a gift, then we will count it as a 90 per cent loan.”
Developer pressure
Once the mortgage offer is sorted, valuation or not, advisers may find their job is not quite over.
“It’s not over yet,” warns Pierson. “The pressure on new build purchasers is tremendous. The developer will want to exchange contracts within 28 days of the would-be purchaser making the offer, or reservation.”
Mortgage advisers who may already have busted a gut to process a mortgage application may then inadvertently find themselves having to act as an unpaid counsellor to their mortgage clients.
Pierson says: “If they are a first-time buyer and unfamiliar with the house buying process they will need some reassurance. Everyone has heard how lengthy house buying can be, in the case of a new build it can be so fast it will take your breath away.”
Clients have to reserve their flat, paying the developer a fee that can be as much as £1,000. This fee is quite often non-refundable and is often paid before a mortgage offer has been secured.
“Once the reserve has been paid, the client has 28 days to exchange, and then completion can be months away.”
Most solicitors will not allow exchange to take place without an offer, but if a mortgage takes longer than 28 days to arrange some developers will allow the would-be purchaser to exchange on a conditional basis.
Pierson says there are good developers who will still impose the 28-day rule but will allow people to walk away with their reserve fee if they cannot get a mortgage. These non-conditional exchange of contracts are quite rare but worth bearing in mind.
“Certain lenders have new build teams on hand to process mortgages quickly, but you as an adviser have to make sure you supply the correct amount of information. I cannot stress how important this is. Remember all this is eating into those precious 28 days.”
Ramping up support
Abbey is one lender that is attempting to ramp up its new build team in anticipation of increased demand for new build. Jeff Scott, head of mortgages at Abbey says the dedicated team would allow the lender to make new build cases more urgent.
“We realise that the new build market is attractive for purchasers but that exchange and completion of contracts can sometimes take longer than usual. Not only do customers have up to 12 months to complete on their mortgage once they have secured their offer, we also guarantee to send out offers on all valid applications of up to 75 per cent loan-to-value within 10 working days.”
Such services do help, but for some clients there is no escape from 28 days of nail biting.
Pierson says: “We’ve got a young client who needs to have employment reference as he’s borrowing to his maximum level. But his boss is on holiday and because he works for a small firm only his boss can write the reference for him. We are already being chased by the builder.”
This is probably because those employed to shift the development are put on commission. Peirson says: “Never forget that with these people there’s an element of making the case appear far more urgent than it needs to be. If you have a good relationship with the client you can help them weather this stressful experience.”
Often builders will develop commercial links with preferred mortgage advisers, which Pierson believes can help the transaction along. “This can help on a practical and emotional level. If you know the builder you will be more familiar with any pitfalls or local nuances.”
Despite a static housing market and the difference in strategies adopted by intermediaries and lenders in the new build market, Pierson argues the sector provides the perfect starting point to get a foot onto the property ladder.
“If new build incentives are put together the right way they are a better alternative than renting, which costs more and, at the end, the couple has no real capital asset. For many, new build is providing a good way of getting on the ladder but mortgage advisers need to know their stuff.”
