6 Nov 2017
Author: Stephen Breen
For many, new builds are the first rung of the housing ladder. They benefit from the Help to Buy scheme which gives you a 20% loan from the Government (40% in London), interest free for five years. For buyers who have saved the required 5% deposit, the Equity Loan means a mortgage of just 75% is required (55% in London), giving you access to some great rates.
Although the Help to Buy scheme only applies to new build homes, more than 100,000 people have taken advantage of its terms since launch. But whilst Help to Buy takes care of the finances, purchasing a new build home is not without its potential pitfalls.
You need to know what buying a new build can mean
If your vision of a new build is a fresh, clean and bright property with zero defects, think again. Buying a new build is a little like buying a brand new car – problems come to light in the first few months which need addressing. Don’t expect everything to be perfect from the second you get the keys – there will be issues, and how quickly/easily those are fixed depends on the builder you are dealing with.
You need to pick your builder carefully
You’d do your research into good manufacturers when buying a new car – so why wouldn’t the same apply to buying a new home? Whilst your builder has certain obligations regarding making good any defects in the property, the ease and speed of sorting such problems will vary from one builder to the next. Rather than going on what it says in the builder’s glossy brochure, check out the HomeOwners Alliance and brand-newhomes.co.uk websites to see what other buyers have said about prospective builders.
You need to know about Buildmark
New builds need cover such as the NHBC Buildmark scheme in order for their buyers to secure a mortgage and release funds. You can see if your builder is registered with the Buildmark scheme on their website here. A scheme such as Buildmark ensures that your property has been built in accordance with the NHBC Requirements which cover technical requirements, performance standards and guidance for the design and construction. NHBC inspectors carry out inspections of all registered developments at key stages during construction to ensure compliance. Your home is then covered for the first 10 years from certain defects (see here for more details).
NHBC inspectors tend to focus on structural defects – so problems of a more minor nature are dealt with by way of a snagging list. The NHBC have created a suggested list here to help you check your home. If you’re not confident doing the check, you can pay someone to do a snagging inspection for you, with costs starting at around £290.
You need to remove the rose coloured spectacles
Typically when you buy a new build, you’ll be shown around a show property which has been set up very carefully to maximise selling potential. Small furniture, clever lighting and a layout prepared by an experienced interior designer will give you a very rosy perspective on how your new home could look. Take off the rose coloured spectacles and look at the space objectively – how big is each room and what space will be left over after your own furniture goes in? Will there be enough storage for your own needs? Is the parking adequate? The showroom representatives have one job and they are usually very good at it, so try not to be influenced by sales hype and pressure.
You need to calculate the total cost
Watch out for service charges and ground rent – these can substantially add to your monthly costs. Service charges can be levied for both leasehold and freehold properties, and might add up to £200 to your monthly spend. You also need to check how this payment might increase over time – a large increase in the future might make your property unsellable.
You can negotiate the price
Although there’s a national shortage of houses, there is also an abundance of new builds, giving you some wiggle room on the price. Many new properties are priced at a premium in comparison with an older home, so it’s worth seeing if you can make a deal. If the development has been around for some time, check to see what other properties have sold for on Rightmove or Zoopla. If the builder won’t discount your property, they might offer you a perk such as paying your stamp duty which could save you money.
You need to find your own solicitor
Never, ever use the solicitor recommended by the builder – no matter how good the deal is or how personal a recommendation it seems. You might think that all solicitors are impartial anyway, but in the past some solicitors who have been recommended by a builder have failed to mention crucial issues to their client – such as exorbitant ground rent increases that could substantially affect the future saleability of a property. The simple answer is to use a solicitor of your choosing.
You need to start paying back the equity loan after 5 years
The Help to Buy Equity loan is interest free for the first five years – but in the 6th year, you’ll be charged a fee of 1.75% of the loan’s value. The fee then increases every year, according to the Retail Prices Index plus 1%. One solution is to remortgage at the end of year 5, taking out sufficient funds to pay back the Government loan. If the property has increased in value, this will be a possibility – assuming your finances are sufficient. However, if the property is the same value or has decreased, obtaining a mortgage for 95% or more of the value could be difficult. You also need to be aware that it can take a number of weeks to complete the remortgage process.
Some buyers find themselves unable to remortgage – perhaps because their finances do not meet the bank’s requirements for a 95% mortgage. This can leave them trapped in their current mortgage, liable for more money on the Government’s loan and stuck with their bank’s Standard Variable Rate of interest which is typically far higher than the fixed introductory rates. You’ll also be vulnerable to Bank of England interest rate rises which can increase your payments further. Before buying, it’s important to crunch these ‘worse case scenarios’ to ensure you can still afford the payments should you not be able to refinance.
See our article Help to Buy Equity Loan Five Years On for more details.