The Risks of Buying New Build Properties: Insights from Nationwide and The Mortgage Works

 

In recent times, the allure of newly constructed homes with their modern amenities and pristine conditions has attracted many prospective buyers. However, these new build properties come with their own set of risks, as highlighted by Nationwide and The Mortgage Works. These institutions have recently identified 135 new build sites as insufficient security for lending, prompting potential buyers to reconsider the implications of investing in such developments.

Why Some New Builds Are Closed to Lending

When a new build site is closed to lending it usually signals underlying issues that could jeopardise the financial security of a mortgage. There are several critical factors that contribute to this decision:

1. Location: The geographical setting of a property plays a pivotal role in its market value and desirability. Sites located in less accessible or declining areas may face challenges in maintaining value, making them a risky investment for lenders.

2. Quality: The construction quality of a new build can vary significantly. Lenders are cautious of properties that may suffer from poor workmanship or substandard materials, which could lead to costly repairs and diminished property value over time.

3. Ground Rent: Excessive or escalating ground rents can be a red flag. Properties with high or unpredictable ground rent can become financially burdensome for owners, reducing their attractiveness to future buyers and impacting their long-term value.

4. Future Saleability: A property's potential for future resale is a major concern for lenders. If a new build is unlikely to attract buyers in the future, it poses a risk not only to homeowners looking to sell but also to lenders who may face difficulties in recouping the mortgage amount in the event of a default.

The Role of an Area Valuer

To assess these risks, lenders employ Area Valuers who conduct thorough evaluations of new build sites. These professionals are tasked with examining the site's location, quality, ground rent, and saleability. Based on their findings, they establish an exposure limit, which dictates the maximum amount the institution is willing to lend on properties within the development.

Financial Implications for Buyers

For buyers, purchasing a property on a closed site could have significant financial repercussions. Without access to lending from major institutions like Nationwide and The Mortgage Works, buyers might face higher interest rates from alternative lenders, increased down payment requirements, or even difficulties in securing a mortgage altogether. Moreover, the potential for depreciation in property value could result in a negative equity situation, where the mortgage balance exceeds the property's worth.

The Importance of Due Diligence

Given these potential pitfalls, it is crucial for buyers to conduct thorough research and due diligence before committing to a new build property. This includes investigating the developer's track record, understanding the terms of ground rent, and evaluating the long-term prospects of the property's location. Consulting with independent property experts and solicitors can also provide valuable insights and help mitigate risks.

In conclusion, while new builds offer modern comforts and the excitement of a fresh start, they require careful consideration and scrutiny. Nationwide and The Mortgage Works' decision to close lending on certain sites serves as a reminder of the complexities involved and the importance of making informed financial decisions when entering the property market.