Lenders are refusing to offer low deposit mortgages to people buying new-build homes and flats over concerns the properties will drop in value – but experts say these restrictions could be relaxed.
Over the past few years, an increasing number of lenders have offered higher loan-to-value (LTV) mortgages of up to 95 per cent to help more people get on the property ladder. That means you’d only need a 5 per cent deposit to buy a home.
But lenders have introduced restrictions so these products cannot be used to buy new-build homes, over concerns that these properties are more likely to fall in value than other properties.
NatWest and Coventry Building Society, for example, will not lend 95 per cent on any new-build properties, while Halifax, Lloyds and Nationwide will not lend 95 per cent on “new-build flats”, but will accept new-build houses.
And Santander recently launched a new product targeting first-time buyers that allows them to buy a home with just a 2 per cent deposit (98 per cent LTV), but said it can only be used on “existing homes” – not new-builds or flats.
However, experts say they have seen signs lenders are starting to relax these rules after several years of strict lending criteria in good news for first-time buyers.
Why are new-builds considered riskier?
New-build homes are typically sold above market value, known as a “new-build premium”. This means that if you come to sell the property in a few years, you could find it has decreased in value.
Experts say lenders are concerned that this could see new-build homeowners fall into “negative equity” when they come to sell, which means their house value is lower than their mortgage size.
Trying to sell when you’re in negative equity means the sale price of your house will not cover your mortgage, so you would have to make up the extra out of your own pocket.
Lenders already take the risk that house prices could dip, which could leave some borrowers in negative equity if they try to sell a property during a market downturn. But you are more likely to end up in negative equity if you have a very high LTV as it leaves less wiggle room for house prices falling.
David Hollingworth, of L&C Mortgages, said: “We’re seeing in the market this so-called ‘new-build premium’, where people are paying more for a brand new house than an equivalent second-hand home.
“This can add risk for lenders offering high LTV mortgages, because there’s the risk that your home will immediately lose value once it’s no longer new and you could fall into negative equity.”
Michelle Lawson, director of Lawson Mortgages, added: “There’s always an element of risk with new-builds, as they’re like driving a new car off the forecourt – they lose value instantly.
“I do think some developers are overcharging on plots, and I’ve seen a lot of people getting caught out by this recently.”
David Morris, head of homes at Santander UK, told The i Paper the business has kept its new product to existing homes because they see new-builds as higher risk.
He said: “For our higher LTV products, we’re only lending on existing houses, because we tend to see there’s a bit more risk in valuations for flats and new-build properties and we don’t want to run the risk of people buying a property that will see negative equity.”
Hollingworth added that new-build flats (and other flats) are a particular risk for lenders, as historically flats have been hit harder by falling house prices than houses.
“During the financial crisis, new-build flats were some of the hardest hit in terms of retaining their value,” he said.
Could lenders loan more on new-builds?
While Santander is restricting its new product to existing homes, it has announced it will now lend up to 95 per cent LTV on new-builds – and Morris said it may revisit offering 98 per cent on new-builds in future.
Morris said: “Around 10 per cent of first-time buyers tend to buy new-builds – the majority of people buy existing houses, so we think what we’re offering is a good compromise at the moment.
“I think we will revisit this [allowing new-builds at 98 per cent LTV] at some point in future, but right now we’ve designed something that’s suitable for the majority of people and that we can safely take to the market.”
Hollingworth added that he is seeing signs that lenders are relaxing slightly on lending on new-builds. He said: “If anything, we have started to see some improvements in LTVs on new-builds. The limitations tend to be tougher on new-build flats than homes now.”
Justin Moy, of EHF Mortgages, added: “I would say lenders are getting more relaxed about properties overall, and have been increasing LTVs on new-builds. “
Pros and cons of buying a new-build
While lenders view new-build homes as riskier for buyers borrowing larger amounts, property experts say there are other factors that could still make a new-build attractive for a first-time buyer.
Hollingworth said: “These houses can be bespoke, and no additional work is required when the buyer moves in, which can be very attractive. They also tend to be very energy efficient, so in exchange for the inflated price, your running costs are lower,” he said.
“Some lenders also offer green deals – where you get a lower interest rate or cashback – for having an energy-efficient property, which new-builds are more likely to be than older homes.”
However, another downside of buying a new-build house or flat is that these properties tend to come with high service charges, which buyers often have little control over.
This means they could rise over time, which has left some homeowners feeling trapped with unaffordable charges they cannot keep up with.
An investigation by The i Paper previously found new-build homeowners with freehold homes – meaning they own the house and the land it is on – are paying more than £1bn a year in estate charges for the management of communal spaces.
Hence then, the article about banks are refusing low deposit mortgages on new builds how this could change was published today ( ) and is available on inews ( Middle East ) The editorial team at PressBee has edited and verified it, and it may have been modified, fully republished, or quoted. You can read and follow the updates of this news or article from its original source.
Read More Details
Finally We wish PressBee provided you with enough information of ( Banks are refusing low-deposit mortgages on new-builds – how this could change )
Also on site :