Mortgages for new build homes

Find out what you need to know about new build homes, including the implications when it comes to securing a mortgage.

Find out what you need to know about new build homes, including the implications when it comes to securing a mortgage.

Daniel Evans
Mortgages expert
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Last Updated 15 NOVEMBER 2021

What is a ‘new build’ property?

A new-build property is one that’s been newly built, or substantially renovated, within the past two years and not sold during that period. If you’re buying a place where work hasn’t started on the land, or the property is in the process of being built, it’s known as ‘off-plan’. Trying to secure a mortgage on an off-plan home can be more complicated than one that’s been completed. 

What are the benefits of new build homes?

  • The property will typically be in a better condition than an older one, meaning lower repair and maintenance costs
  • New builds tend to be more energy efficient  
  • You may be able to choose your own fixtures and fittings, such as flooring, tiles, lighting and appliances 
  • You could avoid some of the costly delays of the regular house-buying process, such as property chains. 

Expert view from David Hollingworth at London & Country Mortgages 

“There have been some issues with new build properties in recent years, for example, problems around excessive ground rent charges. So, it’s clearly important to understand what you’re buying.  However, new build properties can be appealing. It’s often easier to customise the property to your needs, and new builds can be more energy efficient than older properties.  

The Help to Buy scheme has also helped make new homes more affordable for buyers, which in some cases will have helped them buy a bigger property than they would have been able to otherwise.”

What are the drawbacks of new build homes?

  • New build homes are typically more expensive than older properties
  • If the new build home you want to buy is off-plan, you might experience delays if the construction work gets held up
  • A developer is likely to ask for a reservation fee to secure your plot for an off-plan home. You could lose this fee if you pull out from the purchase.

Mortgage lender criteria is stricter for new-builds

You may find that you’re charged a higher interest rate for a mortgage on a new-build property. This is because lenders see these mortgages as riskier, due to the possibility that the value of the property may fall in its early years. This doesn’t always happen, but if it does – simply because the property is no longer ‘new’ – then the lender has less security for the loan it’s provided.

When you buy off-plan, you need to remember that your mortgage offer will probably only last for six months. If the development takes longer, you may need to re-apply for the loan (or see if you can negotiate a longer validity period in the first place). If your financial circumstances have changed during this period, you may find it harder to secure a deal.

If the market value of the property increases or falls during the building phase, you’ll still have to pay the agreed original purchase price when it’s completed. This can have an impact on your mortgage, so you need to discuss the matter with your lender as a priority.  

An increase in value is good news, giving you more ‘equity’ in the property (meaning you own more of it, and reducing the portion accounted for by your mortgage). But a fall in value can be catastrophic. Your lender might withdraw its offer or only agree to loan you a lower amount, leaving you with a financial shortfall and a legally binding commitment to buy or compensate the developer. For this reason, it’s important to think long and hard, and to take advice, before buying off-plan.

Lenders often ask for a higher deposit up-front

You might find that you need to save a larger deposit in order to secure a mortgage on a new build property. The reason for this is that a lender tends to set a lower maximum loan to value (LTV) ratio on new build mortgages. A loan to value ratio (LTV) is the amount you can borrow on a mortgage, compared to the total cost of a property. A provider might offer a maximum LTV of around 75% on new-build flats. This means you would have to save for a deposit worth at least 25% of the property’s price.

Check for the National House Building Council (NHBC)’s Buildmark

Newly-built properties come with a compulsory NHBC Buildmark, which is a 10-year warranty covering quality of construction. Mortgage lenders need to see evidence of the Buildmark. It’s easy to check if a property has been registered for the NHBC Buildmark through the NHBC’s website.

Where can I get help to buy a new-build property?

The government could lend you 20% of a new build home’s full purchase price (or 40% if you’re buying in London) through its Help to Buy: Equity Loan scheme, and you won’t have to pay interest on that loan for five years.

An old version of the Help to Buy: Equity Loan scheme ended in March 2021, but has been replaced with a new version which will run until the end of 2023. There are a few provisos though. The property must be:

  • a new-build and never lived in by anyone else
  • sold by a Help to Buy registered homebuilder
  • the only home you own and live in 

There are also a couple of key differences with the previous scheme. Firstly, it’s only available to first-time buyers, which means existing homeowners now miss out, unfortunately. Secondly, the old property value cap of £600,000, in England, has been replaced with a series of regional caps:

Region (England) Property value cap
London  £600,000
South East £437,600
East of England £407,400
South West £349,000
East Midlands £261,900
West Midlands £255,600
Yorkshire & The Humber £228,100
North West £224,400
North East £186,100

Now, you might be wondering why these caps are so different, with the caps getting lower and lower, the further north you go. The reason for this is, the price caps were set at 150% of the average price, per region, paid by first-time buyers in August 2018. Because house prices are much more expensive in London, compared to the north of England, the caps aim to reflect this.

A similar scheme is available in Wales (with homes worth up to £250,000), but the Scottish equivalent has now expired, and there’s no Help to Buy: Equity Loan scheme in Northern Ireland.

If you’re unsure about whether you can afford a new build property, it may be a good idea to speak with a mortgage broker. 

See more about the Help to Buy: Equity Loan scheme.

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