How Does a Mortgage Work on a New Build?

When considering a mortgage for a new build, the process can seem complex but it’s essential to understand the key factors that differentiate it from a mortgage on an existing property. The primary point that distinguishes a new build mortgage from a standard one is the timeline of construction and the associated risks. While purchasing an already completed home typically involves a straightforward loan process, new builds require more intricate steps due to construction timelines, builder relationships, and legal nuances. In this guide, we’ll dive into how a mortgage on a new build operates, common pitfalls, and how you can secure financing for your dream home.

The Starting Point: Planning for the Future

Unlike buying an existing property, securing a mortgage for a new build often starts before the home is fully constructed. Most lenders offer two main types of new build mortgages: one where you pay interest only until construction is completed and another that functions more like a traditional mortgage, requiring you to start repayment immediately. It’s crucial to be aware of the timeline. When you sign up for a new build mortgage, you’re often purchasing a property that might take months, or even over a year, to be fully completed.

This brings up the first major decision point: the risk of construction delays. Builders often have schedules but not every build sticks to them. Delays can impact your mortgage offer's validity. Most mortgage offers only last for six months, and if your build takes longer, you may need to reapply or negotiate for an extension.

Types of Mortgages for New Builds

There are two key types of mortgages commonly associated with new builds:

1. Standard Mortgage with Early Payments: Some lenders allow for a standard mortgage where payments start as soon as the mortgage is approved, even if the home hasn’t yet been built. This can be advantageous if interest rates are low when you apply, locking in favorable terms early. However, it also means that you’ll be paying for a property you cannot yet move into.

2. Interest-Only Mortgage Until Completion: Another option is a mortgage where you only pay interest until the property is fully built. This option is great for keeping payments low during the construction period but means that your total amount owed doesn’t decrease until after the home is completed.

The Importance of a Larger Deposit

When it comes to new builds, lenders are often more cautious, and one of the ways they mitigate risk is by requiring a larger deposit. For existing homes, you might be able to get away with a 5-10% deposit, but new build mortgages often require at least a 15-20% deposit. This is due to the potential volatility in the value of newly built homes. New builds can lose value more quickly in the short term compared to older properties, particularly if the surrounding area is still under development.

Government Schemes and Incentives

One of the advantages of buying a new build is that many governments offer schemes to make it easier for first-time buyers or those purchasing a new home. For instance, in the UK, there’s the Help to Buy scheme, where the government provides a loan of up to 20% of the property’s value (40% in London), meaning buyers only need a 5% deposit and a 75% mortgage. Other countries have similar schemes that aim to reduce the upfront cost and make homeownership more accessible.

Working with the Developer

A crucial aspect of securing a mortgage for a new build is your relationship with the developer. Many developers have agreements with specific lenders, meaning they might be able to offer you exclusive mortgage deals. It’s essential to check whether this is beneficial or if seeking your own lender will get you better terms. Developers often offer incentives, such as covering legal fees or providing free upgrades, but you must weigh these against the overall cost of the mortgage.

Staggered Payments and Self-Build Mortgages

If you're purchasing a self-build property, where you're responsible for the construction, staggered payment mortgages become critical. In these situations, the lender releases funds in stages based on the completion of certain milestones. For example, they might release an initial portion when the foundation is laid, another portion when the walls are erected, and the remainder once the property is completed. This type of mortgage can be complex to manage but is often the only feasible way to finance a self-build.

Pitfalls to Avoid

One of the biggest challenges with new build mortgages is the potential for the property to lose value after construction. New build homes often sell at a premium, and in the short term, they can drop in value, especially if the surrounding area is still under construction or if there are many similar properties being built at the same time. This could impact your ability to remortgage or sell the property if your circumstances change. It’s also worth considering that mortgage lenders might offer lower loan-to-value (LTV) ratios for new builds, further increasing the deposit requirement.

Another common pitfall is failing to account for additional costs. New build homes often come with added expenses such as customization, landscaping, or unforeseen finishing costs, which can quickly add up. It’s crucial to factor these into your budget when applying for a mortgage.

Conclusion: Is a New Build Mortgage Right for You?

While new build mortgages come with their own set of challenges, they also offer a unique opportunity to customize a home to your exact specifications. If you’re comfortable with the risks associated with construction delays and the potential for value depreciation in the short term, a new build can be a great investment. However, it’s essential to ensure that you have the right mortgage in place and that you understand the terms fully before committing.

In summary, the mortgage process for new builds differs significantly from buying an existing home. With careful planning, understanding the types of mortgages available, and considering the risks, you can successfully navigate the new build mortgage market and secure the home of your dreams.