Last reviewed on 5th August 2023 by Martin Alexander (Mortgage Advisor)
Buying a new home can be an exciting time, but finding a new build mortgage isn’t always easy. As a result, arranging a mortgage before you begin your home search is recommended. Doing so allows you to work with a budget and make buying decisions with confidence.
Mortgages for new builds aren’t that different from regular mortgages. That being said, there are risks to be aware of which we’ll explain in this guide.
- What is a new build property?
- What are the benefits of buying a new build home?
- Are there any drawbacks to new build homes?
- How fast can I get a new build mortgage?
- New build mortgage criteria
- What is the process for a new build mortgage?
- New build developer incentives
- New build mortgage offer periods
- Why are mortgage assessments for new builds more strict?
- Can I buy a new build off-plan?
- Will I need a new-build mortgage lender?
- Getting the best mortgage rates for your new build
What is a new build property?
Mortgage lenders each have their own definition of a new build home. That being said, the majority of lenders would class a newly built home as one that’s just been built, converted, or substantially refurbished within the last two years. If your property is yet to be built or you have a plot of land, this is classed as ‘off-plan’.
Even if your property hasn’t yet been built, getting a mortgage off-plan is still possible. That said, it is more complicated.
What are the benefits of buying a new build home?
Buying a new build home has many benefits, such as:
- Save money on early repair costs as the home should be protected by warranties and be in immaculate condition
- New homes are built to be energy efficient
- Developers may allow you to customise your home
- No upward chain meaning you can move home at a time that’s suitable for you
Are there any drawbacks to new build homes?
There are also disadvantages to buying a new build home, as opposed to a more established property.
- Newly built homes can be more expensive than older homes
- Buying off-plan can result in development delays
- You risk losing reservation fees if you withdraw from buying
- Mortgage assessments tend to be more strict for new build mortgage applications
How fast can I get a new build mortgage?
Some new build developers will require you to complete your purchase within a certain timeframe. You may only be given 28 days from when you initially paid your holding fee, but each developer varies. For new-build mortgage lenders, meeting tight deadlines can be difficult, this is why you should arrange your mortgage before you pay any fees to developers.
Although a mortgage in principle can be provided within a day, a formal mortgage application can take weeks. This is because it involves submitting documents in addition to the lender carrying out their assessments. Furthermore, issues with your application can cause delays so it’s best to avoid this situation by applying beforehand.
New build mortgage criteria
What is the process for a new build mortgage?
The timing of your mortgage is very important when buying a new home. Arranging a mortgage too early can result in your application expiring and leaving it too late can cause a multitude of problems.
The mortgage process for buying a new build:
- Check your affordability – Mortgage advisors can check how much you can borrow and the deals you’re eligible for.
- Begin your home-buying search – You can search online and visit development sites to get an idea of suitable properties and prices.
- Decide on a mortgage type – There are government schemes available such as Help to Buy and Shared Ownership which can help your mortgage application.
- Check your new build warranty is recognised by your lender – Your developer must meet a lender’s criteria also. For instance, your developer will require the right accreditations and certificates on completion of the build.
- Pay a reservation fee to your developer – Reservation fees are typically non-refundable. Once paid, your developer should give you a reservation form which you can give to your mortgage advisor. Deadlines often start from the day you pay your reservation fee unless you’re buying off-plan.
- Apply for a new build mortgage – This will be a formal mortgage application so you’ll need to provide proof of income and identity to your advisor.
- Receive your mortgage offer – Once your lender has carried out a mortgage survey and approved your application, you’ll be ready to start the legal procedure to becoming a homeowner.
- Appoint a conveyancer – You’ll need a property conveyancer to ensure the legal aspects of homebuying are all covered. Developers may offer their legal team but it’s entirely your choice and you may find a better deal elsewhere.
New build developer incentives
Developers may offer incentives to entice buyers. Although this sounds great, incentives can sometimes have a negative impact on your mortgage rates.
If the value of incentives is less than 5% of the property value, it’s rarely a problem. In comparison, if incentives go above 5%, your loan-to-value can also increase.
A higher LTV often means higher interest rates, so do keep an eye on the numbers.
Developers may offer incentives such as:
- Covering the cost of legal fees
- Payment of stamp duty
- Deposit contributions
Some developers may include additional upgrades on the new build. This can include packages for premium kitchens, bathrooms, and home furniture. Incentives are attractive but do keep your mortgage in mind, as they can affect the overall price of your purchase.
New build mortgage offer periods
Mortgage offers are typically valid for 3-6 months. If developers don’t complete the build within this timeframe, you may need to reapply for your mortgage. A lot can change over a few months, so lenders need to be sure their mortgage assessments are current.
Can I extend my offer period?
Some lenders may extend your mortgage offer, but this depends on the lender and the situation at hand. There are mortgage deals that already include extended offer periods that exceed six months.
If you wish to buy off-plan but feel as though the process will take longer than six months, you’ll benefit from mortgages with extended offer periods. In contrast, your home may be ready, but your mortgage isn’t. In situations like this, you risk losing the property as developers can only wait so long.
If you find yourself in this position, you can read our article on fast mortgage applications.
Why are mortgage assessments for new builds more strict?
Lenders tend to be less flexible with new build mortgage applications. Furthermore, your application will face a more thorough assessment from underwriters. This is mainly because of volatility, as new-build properties can lose some value once they’re initially purchased.
Lenders often request higher deposits when compared to regular mortgages to minimise risk. This is to protect lenders from changes in property values.
Can I buy a new build off-plan?
If you wish to buy your new build off-plan, lenders usually have no issue with this. As you can imagine, buying a new build off-plan isn’t uncommon. It’s important to note that lenders won’t release mortgage funds until the building work is complete. This is sometimes where problems can arise.
Most mortgages are valid for six months and if your property is yet to be built within this timeframe, you could lose your mortgage deal. Furthermore, you may have to reapply for your mortgage and pay further fees.
If you’re worried about this, you can request your builders to agree to a long-stop completion date. As a result, the builders will be liable to pay you compensation if the building works exceed the agreed date,
What if the property value changes?
Whether your property value goes up or down during the building phase, you’ll be tied into paying the original purchase price. This can also incur changes to your mortgage, such as the amount you’ll need to borrow.
Any changes need to be made clear to the lender before completion. For instance, if house values rise quite considerably, lenders can withdraw which may leave you with a shortfall.
Will I still need to pay a reservation fee?
Developers tend to charge reservation fees. Withdrawing from buying can result in you losing any fees you’ve paid upfront. This is why it’s important to ensure that purchasing a new build is something that you’re certain of. Furthermore, having the right mortgage in place before you commit to paying any upfront fees is recommended.
With thousands of deals to choose from, we understand that finding a suitable deal isn’t easy. Furthermore, there are a lot of risks involved when buying a property off-plan. You can speak to an advisor who can help you avoid potential problems.
Will I need a new-build mortgage lender?
Mortgage lenders don’t have specific deals solely for newly built properties. Whether the property is old or new, the mortgages you’ll be eligible for will be the same. That said, lenders do treat mortgage applications differently.
If you’re wanting to get a buy to let mortgage on a new build, it’s likely you’ll need a 35% deposit as a minimum. You can look into purchasing your new build with a Help to Buy mortgage if you have a 5% deposit.
Getting the best mortgage rates for your new build
Buying a newly built home is very different from buying a regular home. With options such as buying off-plan and developer deadlines to meet, there’s a lot that can go wrong. Having the right mortgage from the very start is crucial. Furthermore, having a great mortgage rate can save you money along the way.
Brokers can guide you through the new build process and ensure your mortgage will meet your developer’s deadlines. Not having your mortgage funds in place can result in your sale falling through.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.