If you're buying a new build property, you might just find getting a mortgage just got a whole lot more expensive.
A package of measures has been introduced this week to help ensure that valuers, lenders and conveyancers capture the true value of newly-built property -- a market that has been the cause of much controversy over the last few years.
The new rules are intended to cut fraud and over-valuations, giving consumers more protection and lenders increased confidence in the new-build sector.
The Council of Mortgage Lenders is now requiring lenders to ask builders and developers to complete a new ‘disclosure of incentives’ form that must detail any incentives or discounts offered by developers so they can be disclosed to lenders. This will mean that the mortgage can be granted on an accurate valuation.
Why is it needed?
In the past there have been problems with some new-build valuations, especially around the area of incentives, where the developers seem to offer money off but sometimes this is not fully disclosed. This means the lender then finds it difficult to work out what the property is actually worth (which is essential to its lending decision).
For example, a flat in a new build block might be advertised at £200,000 but sold at £180,000 because the developer offers a £20,000 discount.
At this stage the more cynical among us might suggest that the developer had merely inflated the initial price to show a deep discount and the property was only ever worth £180,000. After all, this is the true market price – the price that buyers are prepared to pay for the property.
Where it gets even more confusing is that sometimes this discount is used as what is called a ‘gifted deposit’ so the property is said to be worth £200,000 with the borrower assumed to have paid a deposit of £20,000 and they then borrow a £180,000 mortgage.
Of course, they actually bought it at £180,000 with no deposit and it should be a 100% mortgage, but the lender thinks it is lending at 90% loan-to-value (a £180,000 loan on a £200,000) property.
The problem spirals even further as valuations are based, not just on the property, but on the recent sales of similar properties in the same area. On the above example if another flat comes up for sale in the same block, it might be valued at £200,000 because there is already a precedent of flats going for that amount in the development. Although, as we know, there isn’t really.
These skewed valuations can lead to real problems when buyers come to sell their properties, or rent them out (overblown rental estimates are another problem in this market). The buyers all believe they own places worth £200,000, when in fact they all bought at £180,000.
In an environment of increasing property price inflation this can be disguised quite easily by rampant house price inflation, as we’ve seen in the last few years. But when the market starts to turn, as it now has done, there could be many new-build owners facing negative equity.
What properties are most at risk?
City centre and commuter belt apartment blocks have been the subject of much of the fraud and over-valuations, and buy-to let properties are particularly vulnerable, because both the property valuation and the expected rental income can be overestimated. There have been cases of landlords left with mortgages that are higher than the property’s value plus rental income that is just a fraction of what they told they could receive.
Looking forward
The new rules should help to prevent this. No longer can a developer give a discount that is then used as a gifted deposit, unless this is fully disclosed to the lender and conveyancer first, in which case they have all the information when making a mortgage decision.
As well as protecting consumers the new measures are intended to draw lenders back into the new-build market, as some have pulled away from this type of lending in the past few years.
Before its merger with Nationwide, Portman was one of the first lenders to stop operating in the new build buy-to-let sector, stating that it was not confident of valuations in the market. The new rules should restore lender confidence.
Further support
The CML’s initiative is supported by the Royal Institution of Chartered Surveyors (RICS), which immediately announced it is making changes to the rules used by Chartered Surveyors when valuing property.
From today, they will have to ask the seller, builder or developer for a copy of any ‘disclosure of incentives’ for the new property under consideration.
Like the CML, RICs hopes that the change will help restore confidence in the new-build market and help to improve transparency in the new-build valuation and conveyancing process.
The Home Builders’ Federation, Homes for Scotland, The Law Society of England and Wales, and the Construction Employers Federation have also pledged support for the scheme.
What does it mean for you?
Because lenders will know the true value of any discounts you receive as a new-build buyer, it could mean that you end up paying more on a mortgage. This is because the incentives you are offered no longer count towards your mortgage, unlike in the past.
However, this is completely right and proper, and it protects you and other buyers in the long run as there are no unrealistic expectations of your property price.
The changes offer buyers protection that new-build valuations are fair, transparent and more accurate and, because this may draw more lenders back into the mortgage market, it could in time increase competition which would benefit consumers.
And frankly, the housing market has enough problems in 2008 without the tarnish of inaccurate new-build valuations, so any measures to tighten up this sector is ultimately good news for everyone.