Buyers beware of new-build home headaches
Developers' incentives may be tempting, but costly pitfalls litter the road to completion, warns Chiara Cavaglieri
Sunday 01 May 2011
A brand new home is top of many people's wish list, and now that hard-pressed developers are pushing to sell their new-build properties there are plenty of attractive deals to help first-time buyers (FTBs).
But despite the potential to get that foot on the ladder, the potential pitfalls with new-build developments are numerous, and, with lenders still wary, experts are warning buyers to tread carefully.
The appeal of a new-build home, particularly if you're an FTB, is clear – you get a low-maintenance, modern home that is typically more energy-efficient than a resale property and therefore cheaper to run. If you buy early enough, you may even have a say in the fixtures and fittings, with no need for any dreaded DIY. Crucially, there is no onward chain to scupper your purchase which is a huge problem for buyers in the current climate.
But beware, the glossy brochures are unlikely to show the bigger picture. New-build properties have a reputation for small rooms, thin walls and lack of storage. If you're buying "off-plan", before the home is built, you can never know exactly how the property will turn out. New builds are also notorious for flaws known as "snags", such as broken roof tiles, incomplete tile grouting and kitchen cupboards that don't close properly.
"I always insist that there is specific provision for snagging," says Thomas Moran, partner at law firm Speechly Bircham. "Reputable developers do this anyway, but there are all sorts in the market, some big, some small, so you need a contractual promise than within, say, a year they will come back to remedy any minor defects in the finishing."
New-build homes do benefit from a 10-year warranty from the National House Building Council (NHBC), Zurich Insurance or Premier, covering structural problems. Even so, problems can be far more serious than a dodgy paint job because many new housing sites are built on brownfield land. This is second-hand land previously occupied by another permanent building, such as a factory, and although property developers and local authorities must ensure land is safe for residential building, there is no guarantee that issues won't arise.
A recent report from home insurer LV= revealed that more than one in 10 new homes built on brownfield sites have suffered problems such as flooding, contamination, poor drainage and sewage problems as a result of the land they are built on.
As well as the physical problems that may arise, the biggest hurdle for many new-build buyers is financing, and, having been stung in the past, banks and building societies have reined back lending in this area.
"The new-build sector has been hit hard since the downturn. Values of new-build properties have fallen harder and faster than older homes, which has meant many lenders are nursing losses due to overinflated valuations," says Melanie Bien, of independent mortgage broker Private Finance.
Maximum loan-to-values (LTVs) are far lower for new-build homes than on older properties, and lenders generally won't lend above 85 per cent loan-to-value and no more than 75 or even 65 per cent if you are trying to buy a flat.
This has forced developers to offer tempting incentives to get the sale. For example, Barratt offers its Head Start scheme, enabling FTBs and key workers to buy a home with an 80 per cent mortgage and 5 per cent deposit, covering the remaining 15 per cent itself, which the buyer must pay back over 10 years. Persimmon's Helping Hand scheme covers 15 per cent of the purchase price, paid back when you sell. Other developers may offer to pay your stamp duty or even match your deposit, but you must tell your lender about any discounts so it knows exactly how much you are paying for the property.
"Incentives offered by the builder/ developer can affect the LTV as well. Most lenders will deduct those incentives from the property valuation when calculating the max LTV. So if you're buying for £200,000 with £10,000 of incentives, the lender will consider the property value to be £190,000 when deciding how much to lend," says James Cotton of independent mortgage broker London & Country.
There are wider schemes in place to push new-build sales, including the New Build HomeBuy shared-ownership scheme. This is designed for buyers earning £60,000 a year or less, and enables them to buy shares worth 25 per cent to 75 per cent of the market value of the property and then pay rent on the remainder.
The new First Buy scheme announced in the Budget is another option and is expected to be ready in September. This works on a shared-equity basis with FTBs placing deposits of just 5 per cent and both the Government and house builders providing a five-year, interest-free 20 per cent loan.
However, only around 11,000 people are set to benefit from the First Buy scheme, and, even with financial help, there are still inherent risks with any off-plan property, chiefly because the property's value may fall even in the time between putting down a deposit and completion. If the mortgage company reassesses your home and down-values it, you must still meet the contract price – and there could be a massive funding gap to bridge.
"This might mean you can't get the mortgage you originally wanted, so you may have to pay the shortfall yourself," says Ms Bien. "Alternatively, the lender's criteria may have tightened so you can't borrow as much as you thought you could."
To make matters worse, if prices collapse and you decide to walk away from the purchase, you may not just lose your deposit. If you fail to complete and the developer cannot sell the flat at the purchase price agreed, then, as the original off-plan buyer, you could be liable for the shortfall. To prevent this, ask for a "longstop date" in the contract; this allows you to walk away from the contract without penalty if the completion has not taken place by a set date.
With so many potential drawbacks, it may be worth considering the self-build route instead. This could soon become easier too, with Grant Shapps, the Housing minister, set to announce on Tuesday that the Government will make publicly owned land available to ordinary people wanting to build their own homes under the Build Now, Pay Later scheme.
James Cotton, London & Country
"Buying off-plan is always a bit of a gamble. It takes a fair amount of faith to hand over tens of thousands of deposit if the property isn't physically there, and timescales can be very open-ended – another washed out summer or heavy winter could cause substantial delays"
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