New build mortgages explained

There are lots of good reasons to buy a new home, but arranging a new build mortgage can be more complicated. We take a look at the issues you need to be aware of so you’re in the know from the word go.

Angela Kerr Director, Editor

Let’s start with the basics. In most cases, the process of applying for new build mortgages is the same as if you’re buying an older property. However, with new build mortgages there are some things you need to be aware of. We take a look…

Why buy a new build?

There are clear benefits to buying a new build including:

• Low maintenance – A new build home is a blank canvas with fresh tiling, paintwork, kitchen and bathrooms. This means there should be very little, if anything, you need to do to it.
• Low bills – New build homes have to comply with the latest building regulations. This means they are far more energy efficient than older properties. And this in turn means lower energy bills.
• Chain-free – As you’ll be the first owner you won’t have a chain of buyers above you. This can take away one of the main stresses of buying a home.

But there are also some downsides:

• The new home premium – You pay more for “brand new”. A one-year-old property may fall in value as buyers look at the new-builds popping up in the development across the road instead. If you’re buying a new-build, plan to live in it for the longer term.
• Quality and Snags – We’ve covered numerous new build problems here at the HomeOwners Alliance website and in the press, and summarise what to watch for in our guide Top Tips for Buying a New Build.
• Delays – New builds don’t always run to plan and it isn’t unusual for the move-in date on a new build property to be delayed. As we explain here, too long a wait can affect mortgage offers.

If you’re getting a mortgage for a new build you’re buying, make sure you do your research starting with our guide on the Pros and Cons of New Build.

What deposit do you need for new build mortgages?

Mortgage lenders are often stricter on the amount they are willing to lend on the purchase of new builds. This is to protect themselves from the inevitable devaluation of the property in the early years.

The loan-to-value ratio for new build mortgages is also often tiered with lenders prepared to loan you less for a new build flat than a new build house. Nationwide, for example, will offer a maximum 75% LTV mortgage on new build flats (meaning you’ll have to find a 25% deposit) but up to 85% LTV mortgage for new build houses (and leaving you to find a 15% deposit). But this differs according to lenders.

This means that if you’re looking for a mortgage on a new build flat, you may need to be prepared to save up a bigger deposit than if you were buying a house.

However, there are some ways to get new build mortgages with a small deposit. For example, if you buy through the Deposit Unlock scheme you can buy a new build home from a participating builder with a 5% deposit – see below for more details.

Timescales for getting new build mortgages

Developers can often work to demanding timescales and once you’ve put down a deposit you may have only 28 days to exchange. That can be a challenge when it comes to getting new build mortgages because some lenders may struggle to complete your application within that time frame. The best way to counter this is to prepare so that you increase your chances of making a successful mortgage application, and start the mortgage process as soon as you can. You can also save time by using a mortgage broker, so they can be particularly useful with new build mortgages.

New build mortgage offer periods

Buying a new build off plan (before it’s built) shouldn’t present any problems in itself when getting a mortgage. Most lenders are familiar with this scenario. However, when it comes to new build mortgages there may be an issue around how long your mortgage offer is valid for. It varies by lender, but most are only valid for a maximum of six months. In other words, you have six months from mortgage application to complete on your home purchase.

So when it comes to new build mortgages, if you think your new home isn’t going to be ready within that time, you may be able to get the lender to extend the offer during the period. But, in most cases, your mortgage application will need to be re-assessed by starting your application over again.

Recognising that many new build projects can be subject to delays, some lenders have special new build mortgages. These new build mortgages have a longer validity period that can be up to three months longer than their usual deadlines. Mortgage brokers will know the products which will remain valid for longer. Mortgage brokers will also be on hand should you need to move quickly to re-apply or find an alternative lender.

Get advice on new build mortgages from our fee-free mortgage broker partners at L&C. They know which lenders will make your new build purchase go smoothly.

When do you start paying the mortgage on a new build?

You may have to pay a reservation fee to secure your new build home and you may also exchange much earlier than if you’re buying a non new build property. However, when it comes to when do you start paying the mortgage on a new build, this is no different to if you were buying a standard house. So with new build mortgages, you’ll start paying the mortgage after you’ve completed.

The new build mortgage process – an overview

So what is the new build mortgage process? Here are the steps you’ll need to follow…

1. Check what you can afford. Contact a fee-free mortgage broker to see how much you can borrow and which deals you might be eligible for. Let them know if you’re considering buying a new build as new build mortgages may require you to have a bigger deposit.
2. Start your search. Look online for new build homes in your preferred area. Zoopla have a search function dedicated to new builds.
3. Decide if you are using a scheme to help you buy. If so, you need to understand how government schemes like Shared Ownership work and what it means for new build mortgages. See below for more information.
4. Research the developer of your preferred property. Our guide on choosing the best new build home builder can help.
5. Be a savvy new build buyer. Before making an offer and negotiating a price read our guide to buying a new build.
6. Appoint a conveyancer. Read our guide to the new build conveyancing process. And don’t feel pressured to use the developer’s in-house conveyancing solicitor: you need to shop around to get the best deal.
7. Pay a reservation fee. Now you’re ready to go ahead and pay a reservation fee to the builder. Give the reservation form to your mortgage broker and they will start looking for the best mortgage deal for you.
8. Apply for a new build mortgage. You’ll need to move quickly with new build mortgages because the 28-day deadline starts on the day you pay the reservation fee. Have your proof of income and proof of identity ready.
9. Secure your mortgage offer. The lender will issue a mortgage offer once it has carried out a mortgage valuation survey and approved your application. You’ll then be ready to exchange, to pay a deposit and set a completion date, although this may be moved back if there are any delays.

How much can I borrow on a new build mortgage?

This will depend on factors including your income, the size of your deposit and your credit score. However, a typical affordability calculation is 5 times your salary, although some mortgage lenders will let you borrow more. But it’s not just your income mortgage lenders look at though, they’ll take into account your financial commitments when they’re assessing your affordability. To find out instantly how much you may be able to borrow on your income, try our handy mortgage calculator. And for a more detailed look at how much you’ll be able to borrow on a new build mortgage it’s a good idea to speak to a fee-free mortgage broker.

New build mortgages: How does the Deposit Unlock scheme work?

Now that the Help to Buy equity loan scheme has closed to new applicants, the Deposit Unlock scheme may help to fill the gap it has left. Deposit Unlock is a new scheme developed by the Home Builders Federation to help first time buyers and home movers buy a new build home with a 5% deposit. However you can only buy a home from a house builder participating in Deposit Unlock and using one of the new build mortgages offered by a participating lender.

For information about Deposit Unlock, participating builders and mortgage lenders, see our advice guide Deposit Unlock explained.

New build mortgages: How does Own New Rate Reducer work?

The Own New Rate Reducer scheme allows you to buy a new build home with a mortgage and pay a lower mortgage rate than if you buy on the open market with a traditional mortgage. When you choose your property, the developer will agree to contribute 3% or 5% of the purchase price. House builders do this as an incentive for you to buy their properties. The developer’s contribution goes to your mortgage lender, via Own New. The lender will take the developer’s contribution of 3% or 5% and offset it against the mortgage interest to reduce your monthly payments for the first 2 or 5 years, depending on the length of your initial term. See our guide for more information on the Own New Rate Reducer scheme.

Shared ownership and new build mortgages

And if you want to buy a new build home and you only have a small deposit you may want to consider shared ownership. Some developers and housing associations offer new build properties where you buy a percentage, perhaps 50%, of your house and pay rent on the rest, which the housing association owns. See our guide for more information on shared ownership mortgages.

New build mortgages? Brokers can help

If you’re looking for a mortgage on a new build, it’s a good idea to approach a mortgage broker. Not only will it save you time because they’ll shop around for you but they often have access to deals that you won’t be able to find yourself. Plus they can be very helpful when it comes to arranging a new build mortgage.

New build developer freebies

Some property developers advertise sweeteners such as having your stamp duty or legal fees paid in order to set their development apart from others.

While these offers are less common of late, they do still exist. A developer would much rather offer an incentive to make the new build premium price more palatable to buyers than reduce the purchase price overall.

It’s worth noting, that mortgage lenders will take account of any builder incentives such as paying legal fees, stamp duty or cashback when considering your mortgage. If the incentive is worth up to 5% of the value of the property, there should be no issue. But, if they exceed this point, there could be issues.

A lender could still agree to a mortgage, but they may knock the amount that surpasses the 5% point off the purchase price. This can have a significant impact on your loan to value (LTV) and impact your mortgage rates. If you’re unsure about how an incentive could affect your mortgage application? Get free advice now

New build incentive limitations

What if the value of the property drops between exchange and completion?

When you’re buying a new build, you’ll pay the deposit when you exchange and you’ll also be asked to sign a contract (usually prepared by the housebuilder) agreeing to buy the property at the current advertised price and to pay off the balance at completion.

The major concern here for buyers is that mortgage lender property valuations are usually undertaken at the beginning of a new build and after construction is completed. So if property prices fall within that period therefore, and the buyer is unable to secure a mortgage for the remaining balance (due to a perceived reduction in security for example), then the deposit will be lost due to breach of contract.

Also, the housebuilder can also sue the buyer for the difference between the agreed price and the lower price it subsequently achieves at re-sale, as well as any legal fees incurred. As such, many experts urge buyers to establish if the contract price is ‘locked’ at exchange therefore and, if so, what happens if prices rise or fall before completion.

For more information read our guide New build conveyancing explained

Frequently asked questions