New builds: what you need to know about finance and insurance
The big difference between buying a ‘second hand’ property and a new build is that when you buy brand new and off plan, you’re dealing with a developer. They have their own terms of sale and, because the house probably isn’t built yet – or isn’t finished – you can’t be absolutely sure how long that’s going to take.
There are three main things to know:
1. 28 days to exchange
From the time you register your deposit with the developer, you usually have just 28 days to exchange contracts. That means, if you’re buying with a mortgage, your lender only has 28 days to issue the offer and your solicitor needs to be ready with the paperwork.
Although mortgage offers might only take 2-4 weeks if it’s a straightforward application, it's not unusual to have to wait a lot longer. So, especially if you’re buying at a busy time for your lender and they’re not used to dealing with new build applications, the timescale might be a challenge for them. As such, it’s advisable to use a mortgage broker that’s experienced in sourcing new build mortgages.
2. The impact of a delay on your new build
Most lenders will state on the mortgage offer that it’s valid for a maximum of 6 months, meaning you have to complete your purchase within that time. If there’s a delay with the developer and your property isn’t ready in time, one of two things will happen: either the lender will agree to extend the mortgage offer or you’ll have to start the application process all over again.
The good news is that, because delays with builders aren’t uncommon, some lenders have now got specific new build mortgages that are valid for up to 9 months. So, check with your mortgage broker about current new build products.
3. Lower Loan-to-value ratio (LTV) on your mortgage
Because you pay a premium when you buy a brand-new property, lenders have to protect themselves against a potential drop in capital value in the first few years. To do this, they’ll generally offer a lower maximum loan to value than for a ‘second hand’ home, meaning you’ll probably have to put down a larger deposit. The percentage they’re prepared to lend could also be different, depending on the type of property you’re buying, with maximum LTVs on flats often lower than on houses.
If you’d like some more advice on getting a mortgage for a new build, our partners, Embrace Financial Services, will be happy to give you a free initial consultation. You can arrange an appointment via our website
Although you do benefit from a builder’s warranty when you buy a new home (usually valid for ten years), that only covers you for problems that are the builder’s fault, so you need to take out your own Buildings Insurance to cover everything else. This is something your mortgage lender will require you to have in place before you exchange contracts.
The postcode issue...
When calculating your insurance premium, insurers do a postcode search to assess the area in terms of crime, flood risk, etc. So, one thing to be aware of - particularly if you’re buying on a large new development - is that a new postcode might not be on the insurer’s system yet. And if it’s not there, you they probably won’t be able to insure you.
That means you’ve got to use an insurer that updates their systems regularly to capture new postcodes. Obviously, checking yourself can take quite a bit of time and effort, so we’d recommend you use an insurance broker, who will be able to guide you to the most appropriate insurers.
At Your Move, we understand the importance of protecting your investment. We offer a range of insurance products for landlords whether you let just one property or a portfolio.