The supply of new build houses has been building steadily in the UK for the past decade and, as a result, more and more young people are looking towards these brand-new houses as potential homes. However, with specific mortgage products for new builds and government schemes designed to support buyers, there are a few things all potential homeowners need to be aware of.
Understanding Mortgages for New Build Homes
A mortgage is a loan specifically designed to help individuals purchase property. While the basic concept of a mortgage is straightforward, new build homes often come with unique requirements that may affect the type of mortgage available to you. For example, lenders sometimes require a larger deposit or impose stricter terms for new builds due to the perceived risks associated with construction timelines and property valuations.
When buying off-plan, where construction hasn’t been completed yet, timing is key. The mortgage approval you receive will typically have an expiration date, and delays in construction could impact the validity of your mortgage offer. Some lenders have tailored products to address these challenges, offering longer-term mortgage offers that remain valid for up to six months or more.
Additionally, lenders may have specific rules for financing new houses due to these risks, making it essential for buyers to research which lenders offer the most flexible terms. It’s important to understand that new build homes can sometimes require specialised mortgage products, so working closely with a lender experienced in new build financing can ensure a smoother process.
Government Schemes and Support for New Build Buyers
For buyers in the UK, the government offers various schemes designed to make purchasing a new build home more affordable. These schemes can reduce the size of the deposit required or lower the mortgage amount needed, making it easier for first-time buyers to step onto the property ladder. Some of the most relevant schemes include:
- Help to Buy Equity Loan: While this popular scheme closed to new applicants in 2023, it allowed buyers to borrow a percentage of the home’s value (up to 20%, or 40% in London) interest-free for the first five years. The closure of this scheme has led to new initiatives being introduced.
- First Homes Scheme: This new initiative offers homes to first-time buyers at a discount of at least 30% compared to market value. These discounted homes are aimed at local buyers and key workers, providing a more affordable route to homeownership.
- Shared Ownership: This scheme allows buyers to purchase a share of a property and pay rent on the remaining portion. It’s an option for those who may not be able to afford the full price of a new build home.
Fixed-Rate vs. Variable-Rate Mortgages: What’s Best for New Builds?
Choosing between a fixed-rate and a variable-rate mortgage is a key decision when financing any home, and it can be particularly important when purchasing a new build property. Here’s how the two options compare:
- Fixed-Rate Mortgages: These mortgages offer the security of a fixed interest rate for a set period, usually between two and five years. This can be appealing during times of economic uncertainty, as it protects you from rising interest rates. For buyers of new builds, where the property’s value may increase as it’s completed, a fixed rate can offer financial stability and peace of mind.
- Variable-Rate Mortgages: These mortgages come with interest rates that can change over time, depending on market conditions. While they offer more flexibility and the potential for lower initial rates, there’s a risk that rates may rise, increasing your monthly payments. Given the current climate of rising interest rates in the UK, it’s important to consider whether a variable-rate mortgage is worth the risk.
Special Considerations for Off-Plan and Custom-Build Properties
When purchasing an off-plan or custom-build property, where the home is bought before construction is complete, the financing process can differ from a traditional mortgage. Off-plan homes are typically purchased based on the developer’s plans, which means buyers need to secure a mortgage before the property is finished.
- Loan-to-Value (LTV) Ratio: Lenders may offer lower LTV ratios for off-plan properties, meaning you may need a larger deposit. This is because there’s a perceived risk associated with buying a home that hasn’t been completed yet, as construction delays or issues with the build could impact the final value of the property.
- Completion Guarantees: To mitigate risk, some lenders offer completion guarantees, which ensure that your mortgage offer remains valid for an extended period, even if construction is delayed. This can provide buyers with added security, especially when buying from developers who may experience timeline issues.
Final Thoughts
Financing a new build home requires careful consideration of your mortgage options and understanding the unique aspects of buying a new property. From specialised mortgage products to government-backed schemes, UK buyers have access to a range of support options that can make purchasing a new build home more affordable. Whether you’re opting for a fixed or variable-rate mortgage, or buying off-plan, it’s essential to work with a knowledgeable lender to navigate the process and secure the best deal for your circumstances.
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