Introduction
In this post, we’ll discuss everything you need to know about new builds from locating them to moving in. So, whether you’re just starting your search or need a few bits of information, read on, the topic is talked about in depth in this article.
What are new builds?
A new build most of the time is a property that has been constructed from scratch, as opposed to being converted from an existing structure or renovating an older property. However, if most of the build had been recently constructed, then the project can also be classed as a new build.
New builds also must have never been sold or leased for rental income. The new build classification is protected because it must be classified for different taxes, warranties and benefits under the law.
For example, people in the UK use new builds as part of the help to buy scheme to get on the property market. If their property isn’t a new build classification, people cannot qualify for the government loan specific to the agreement.
This is similar to other scenarios in the property market for example, where landlords cannot benefit from the government benefits of the build to rent scheme unless a building qualifies under the build to rent terms. So, protecting agreements in this sense is extremely important.
When were new builds introduced?
New builds started increasing in production when the government introduced the help to buy scheme. This allowed members of the public to buy a home with just a 5% deposit by being eligible for a government loan that would go towards a deposit.
This gave construction companies massive incentive to build new homes as there became a high demand for the purchase of new properties as new buyers gained buying power in the market.
Subsequently, when the government released the starter home fund in 2015, it injected £26 million into the UK for the development of brownfield land.
Brownfield land refers to previously developed land not currently in use, meaning local authority-owned land would be freed to build new homes and meet government targets.
Also, the Starter Homes Local Authority Funding Programme was also released with a £10 million budget with a similar aim. These funds have since been withdrawn.
However, the idea of buying new builds has caught on due to the help to buy scheme and now, there is a real demand for first-time buyers to get onto the property ladder by purchasing new builds.
Hence, there’s a massive incentive for construction companies to buy and build on new land. This is a great opportunity for the government to introduce regulations like The Future Homes Standard which plans to improve the living conditions for dwellers as well as reduce greenhouse gas emissions by 75% – 80%. For more on this standard click here
What is the definition of a new build?
A new build property is a property where most or all of the development has been constructed within the last two years that has never been bought, sold or rented.
In order for a home to qualify as a new build with some of the structure of the property already being there, a significant amount of structure would have to be added to the property. As a result, it qualifies as a new property if most or all of the rooms in the house were added to it.
For example, a one-storey flat that is constructed with three additional floors for the same home will be considered a new build but a house with an extension added to the kitchen will not fall into this category.
Renovations and the restoration of space that is already there are not sufficient for putting a property into new build status.
How long do new builds take to build in the UK?
In the United Kingdom, the process of constructing a new build can take anywhere from a few months to a few years. The length of time required depends on a number of factors, such as the size and scope of the project, the availability of construction workers, and the economic climate.
New build projects can also be delayed due to planning permission issues or financial problems. However, once construction gets underway, most new builds are completed within a year. This is often followed by survey called a period of snagging, during which any minor defects are corrected. After that, the new build is ready for occupancy.
Are new builds cheaper to buy?
New builds, relative to the value of homes that are second hand are most of the time more expensive to buy. This is due to the promise that the property will appreciate in value over time as well as have lower running costs. Making the proposition of paying a higher price worth it to a lot of buyers.
New builds are usually built in a cluster of homes or flats and may even have privately owned roads and shared outdoor space. The hope for many buyers is that after the development has been finalised and all of these services come together, the development will become attractive enough for the price of their property to increase.
Unfortunately, this is not always the case. Developers cutting corners and overpromising on the long term value of a house is common when selling to first time buyers.
This is due to first-time buyers often completing the purchase of a house long before the property has been finished. Here, buyers make inaccurate decisions based on pictures and plans. Much like if there was a tenant in situ living in their house preventing them from having a viewing.
Through methods like this, developers can entice a new buyer to poorly planned and constructed properties using show homes that look far superior to the end product. Leaving clients disappointed when they move in.
However, it is not all doom and gloom, the price of new builds can be justified. You just have to do your own research. And even if there is a premium to pay, it may be worth it for first-time buyers as new build homes make it easier to gain approval for a mortgage.
Aside from the help to buy scheme, the National House-Building Council certificate that comes with new build properties also makes it easier for lenders to approve a mortgage application.
This accreditation supports the approval of mortgages for first-time buyers by providing a warranty. Helping to protect the house without the need to pay additional home insurance.
Do new builds lose value?
Quality of construction, location, and overall success of a set of new build properties are all reasons a property can go up or down in value over time. Other factors may be whether housing demand has been oversupplied or the current economic climate.
These factors all help drive demand for the purchase of new builds. If you aren’t willing to take the risk that a property could go down in value, you should look for alternative property investments.
The biggest reason for new builds losing their value is because of poor construction methods, impacting the quality of construction. However, there are some laws in place to protect buyers from developers looking to make a quick profit by cutting corners.
Some developers offer a warranty that covers you for typically 10 years. Developers will face fines and penalties if they are unable to provide this warranty for whatever reason.
This is a reasonable thing to ask for as a buyer. This also makes your property more attractive to sell if you decide to get rid of it within those 10 years, passing on the warranty to further buyers who perhaps look to make an investment or buy a second home.
How much can you negotiate off a new build house UK?
It is definitely worth negotiating when purchasing a new build home, but how much can you negotiate?
Some find they can negotiate up to 15% off the initial asking price of a new build but this data varies greatly throughout the UK and what kind of development it is.
Buyers may find that a show home or architectural plan used to sell a property isn’t anything like the new builds they’re buying. This gives them a reasonable argument to knock money off the initial asking price.
However, there is a limit to the amount you can negotiate as many lenders will offer a loan-to-value ratio that must be followed. Negotiating down the price of your new build significantly may result in the need to find a new mortgage term or a new lender.
Pros and cons of new builds for buyers
New builds have some obvious benefits and drawbacks but also a lot of topics and legalities that are harder to identify. This breakdown helps you consider all of the variables around new build housing.
Pros of New Builds
New builds are often considered to be more energy-efficient than older properties due to being built with modern construction methods and materials. Adding to this, when buying a new build in the correct area, at the right price, you can benefit from the appreciation of your property over time, so there is a long-term financial incentive.
They also don’t come with any need to renovate your property when first moving in like a lot of second home buyers have to do. This can get expensive for people needing to renovate. Especially when unexpected problems occur. For instance, the discovery of asbestos in your home is expensive to remove.
Finally, new build homes are great because as a buyer you’re able to choose options on your house if you purchase the house before it has been completed. This can include custom carpets, flooring and materials. Allowing the buyer to start from scratch.
Cons of New Builds
Firstly, the predominant factor that deters people away from the new build market is the premium you have to pay when buying a new build when comparing it to houses of equivalent capacity that have been previously owned.
There is a risk that this premium will not be worth it in the long term due to the property not appreciating. A market that favours renting for example will cause high rental yields that drive down the demand for house purchases with most looking to rent rather buy for appreciation. This balance can be better understood here.
This can get worse if you don’t meet your mortgage payments and need to exit your mortgage for whatever reason. Especially if you have taken out a “help to buy loan“ which you’ll only have 5 years before you have to start paying back.
If your home hasn’t appreciated in value or worse depreciated since purchase, remortgaging your home to pay back loans can set you back thousands. Not to mention moving costs. As you’ll have a deficit in the new equity of your home.
New build homes also come with initial defects. Simple construction errors like faulty plumbing, unreliable switches or wonky bannisters are all things prevalent in new build properties. This can get expensive if you don’t fix these repairs during a snagging period or if you don’t have access to a repairs warranty.
These defects are becoming increasingly common as the government puts pressure on developers to meet the minimum requirements for properties as they meet the minimum building requirements. So, even if your house doesn’t have defects, the overall build of the property may just appear cheap or unprofessional.
Adding to this, sometimes, new build properties are built on land that isn’t owned by the buyer. This is known as owning a home as a leaseholder as opposed to a freeholder. Developers often want to keep the ownership of the land due to the option to build more developments nearby and charge for services on the grounds of the new build such as lawn care.
This is a big downside for buyers as it impacts the freedom of homeowners. It means things like property extensions need written permission from the freeholder and may be denied. Worse yet, it is typical to be charged service fees which maintain the grounds of your property, an additional cost people buying a second-hand home don’t have to deal with.
New builds vs old build homes
With all points considered, old build homes are less attractive to those wanting to start from scratch. They also don’t qualify first-time buyers for a help to buy loan. Making them harder to gain ownership for those on a lower income.
However, there is a risk associated with buying a new build home, including making sure your property is able to appreciate, there are no severe defects and ensuring the additional costs associated with the development are worth the value you get from the property.
For some, this may be considered too risky and you should consider if it is worth just relying on your pension. Read our article on property vs pension in this case.
The process of buying a new-build
The process of buying a new build is fairly straightforward. The main deciding factor is finding the correct new build to suit your needs and identifying if this build is worth the price you’re paying. The below steps guide you through it.
Get your finances in order
The first step is to assess your financial situation and improve on it if necessary. When buying a new build, regardless of whether you do it under the help to buy scheme or not, you will be applying for a mortgage.
As a result, much as if you were applying to any other mortgage type such as a buy to let mortgage, you’ll need to get a decent credit score, save for a deposit and have proof of having a sufficient earned income relative to the price of the property.
If you’re not sure about these documents, you can speak to a mortgage advisor who will conduct a lot of this research and paperwork on your behalf.
Find a property
Once you have worked out your finances, you should be able to calculate what kind of property you can afford to buy. Couple this with any personal preferences you may have and with the help of an estate agent, finding new build homes will be a lot more straightforward.
However, an often overlooked factor when finding new build properties is that a lot of the properties advertised on the market are not actually built yet.
As a result, you may need to visit the developer’s office and view a show home, see floor plans and perhaps explore options for your home, allowing you to customise it by buying early. This is known as buying off-plan.
This customisation aspect is highly desirable for a lot of buyers who want to get creative, designing their ideal home after being restricted from paying rent for so long.
Get a mortgage offer and financial documents
Once you have decided on the type of home you want. Next, you should go to a mortgage advisor or lender who will guide you on the finances available to you in the price range you’re looking at. This will give you the confidence to make offers and reserve a property once you know what your budget is exactly.
If using a help to buy loan, you will need to get a mortgage offer for at least 25% of the value of the home but only have 5% available in cash. The government equity loan will cover the remaining 20%.
This step is often the most daunting as it’s where you take on debt. However, you don’t need to accept your mortgage to make an offer on your new build home. You just have to have the offer approved and available.
Make an offer
The next step would be to make an offer on a home that suits you. Much like a property auction, this is where you can attempt to negotiate on price. Once this offer is accepted, you’ll be able to confirm your mortgage offer and a government loan.
Once everything is approved, reserving your property will be easy. Simply pay a reservation fee to the developer to secure your property and your mortgage will come into effect once you move in. Other fees like land and building transaction tax, council tax and stamp duty will be taken at this stage
Wait to move in
Finally, you now have a home to move into. If your new build is almost complete you won’t have to wait for long. However, it is not unheard of to wait for up to a year for your home to have finished construction so you can move into your new space.
Be sure to speak with your lender about the time it takes to move into your new build as most mortgage offers only last for 6 months. If your new build takes longer than 6 months to complete, you may be able to explain this to your lender to get additional time to accept your mortgage offer.
New build mortgages
New build mortgages often get confused because of the scheme’s affiliation with government loans, part of the help to buy scheme. The process is very simple and just a step more complicated than any other mortgage used to buy a home.
Is it harder to get a mortgage on a new build?
Despite new builds being energy efficient and eligible for the help to buy scheme, lenders are also very aware of the risks associated with new builds. The main risk is the asset depreciating over time and becoming difficult to sell on.
In the event a lender has to repossess a property due to the inability of the buyer to pay the mortgage, a lender needs to make sure there is enough money in the value of the home to offset the money lent. This is why it’s hard to get a good valuation on a new build for approval of a mortgage.
Adding to this, because new build homes are often more expensive than second-hand homes on an apples-to-apples comparison. As a result, many people are simply priced out of a mortgage for a new build home. Deeming it not worth the price they’re paying.
How much deposit do I need for a new build mortgage?
Using the help-to-buy scheme, you will need just a 5% deposit to qualify for the purchase of a new build. This is made possible as producing the 5% on the value of the house makes you credible for a government loan which covers 20% of the price of a property and up to 40% in London. This additional loan is then used as a 25% deposit for a mortgage. The exact details of the help-to-buy scheme is on this link.
Foregoing the help-to-buy government loan is also a possibility if you have the capital available. Lenders will usually ask you to pay a 20 – 30% deposit in cash.
Conclusion
To conclude, the decision to buy a new build home as opposed to a second-hand home is a big decision for first-time buyers. Especially those who have a lack of budget and already feel left in the cold from an already competitive UK property market. Especially in London.
There are good and bad stories from both sides of the coin. So, whether you think a new build is good to purchase is up to you as a buyer. It all depends on what risk you want to take, what exposure to the property market you want to have and what returns you expect after buying.
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