What You Need to Know About New Build Mortgages

Buying a new build property is an exciting prospect, and with the government's new Your First Home scheme putting new builds back in the spotlight, it is a topic that is coming up in conversations more than ever. The mortgage process for a new build is broadly similar to buying an existing property, but there are some important differences that are worth understanding before you start.

Why New Builds Are Treated Differently by Lenders

Lenders approach new build properties with a degree of caution that does not always apply to older homes. The primary reason is valuation. A new build property often carries what is known as a new build premium, meaning the asking price can be higher than the value a mortgage lender's surveyor places on it. This is because the premium reflects the fact that the property is new and unused, and lenders are lending against the open market value rather than the developer's asking price.

In practical terms, this means the loan-to-value ratio your lender agrees to lend on is calculated against the surveyor's valuation rather than what you have agreed to pay. If the two figures differ, you may need a larger deposit than you had planned.

Deposit Requirements

Most lenders require a minimum deposit of 10% on a new build house and 15% or even 20% on a new build flat. The flat requirement is higher because lenders view new build flats as carrying more risk in terms of future resale value. Not every lender will lend on new build flats at all, which can limit the options available, particularly in certain parts of the country.

Reservation Fees and Exchange Deadlines

When you agree to buy a new build, the developer will typically ask for a reservation fee to take the property off the market while the legal and mortgage process gets underway. This fee is usually between £500 and £2,000 and is often non-refundable if you withdraw, though it is normally applied to the purchase price on completion.

The exchange deadline is one of the most significant differences in a new build purchase. Developers typically require exchange of contracts within 28 days of reservation, which is a considerably shorter timeframe than a standard property purchase. Getting a mortgage offer in place before or very quickly after reserving is therefore important. A mortgage agreement in principle before you reserve gives you a much cleaner run at the exchange deadline.

Completion Deadlines and Mortgage Offer Validity

New build properties, particularly those bought off-plan before they are finished, can have fluid completion dates. A standard mortgage offer is valid for six months, which is fine for a property that is ready or nearly ready. For off-plan purchases where completion might be further away, there is a risk the offer expires before the build is finished, and you may need to apply again, potentially at a different rate.

It is worth discussing the anticipated completion date with the developer and making sure your mortgage adviser is aware of it. Some lenders are more flexible than others about extending offers, but it is not guaranteed.

Developer Incentives

Developers frequently offer incentives to attract buyers, including cashback, paid stamp duty, fitted kitchens or other additions. Lenders treat these carefully. Some incentives are acceptable, others can reduce the amount a lender is willing to lend because they effectively reduce the net price paid. Your mortgage adviser will need to disclose any incentives to the lender, and you should be transparent about what has been offered.

The Your First Home Scheme

The government's newly announced Your First Home scheme, due to be detailed at the Budget on 28 October, will allow first-time buyers to purchase new build properties with a 2.5% deposit supported by a government equity loan of up to 20%. It mirrors the original Help to Buy (which is now not available) approach and is designed specifically for new builds. The equity loan is repayable, and the government will hold a stake in the property until it is paid off or the home is sold. Full details including income and property price caps will be confirmed at the Budget, so there is more to understand before deciding whether it is the right route for your situation.

Getting the Right Advice

New build purchases move quickly, and the mortgage needs to keep pace with that. Taking advice from an expert broker who understands the new build process gives you access to a comprehensive range of lenders who are comfortable with this type of purchase and provide most suitable chance of getting an offer in place in time for the exchange deadline.

If you are considering a new build purchase or want to understand how the Your First Home scheme might work for you, I am happy to talk it through and look at what the options are for your circumstances. Get in touch and we will take it from there.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Barry, The Mortgage Network - Helping you make confident decisions and plan a mortgage that works for you.