How to get a mortgage to buy a house not on-plan in the UK
Many people contact us to ask questions about buying a house off-plan.
It can be challenging to get a mortgage buying property off-plan. Some lenders may not be willing to lend, mainly if certain materials are used.
We work with specialist mortgage brokers who are knowledgeable about buying off-plan. We are happy to answer any property purchase questions and introduce you to a mortgage lender.
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What does buying off-plan mean?
Off-plan buying means you are purchasing a property before its construction.
A contract is required to buy an off-plan property. To secure the plot, a deposit must be paid. Although the deposit amount can vary between developers, it is often higher than 5%.
What are the benefits of buying the plan off?
Off-plan house buying has many advantages. First, you will be the only homeowner to live in the house, giving you a blank canvas to work from. You are purchasing a building site, to begin with.
Decoration costs are low.
Many new homes are designed in neutral tones, so you don’t have to decorate. This reduces the cost of redecorating and repairs for the first few years.
Many developers offer a variety of fixtures and fittings (often at an extra cost), which allows you to personalise the property.
Insurance and guarantees
You can get a 10-year guarantee on new properties, such as the National House Building Council (NHBC), which comes with new properties. You would have consumer protection if something happened to the building structure.
Developers may also offer insurance for new homes, which is very useful as many insurance companies are reluctant to insure them.
What are the potential risks when you buy a home on a plan?
There are risks associated with property purchases. Before you commit to an off-plan loan, it is essential to consider the following:
Financial risks could exist
Even though your property is brand new, it will usually lose its value once you move in. If you are planning to move soon, this can make it difficult as you might not be able to get your money back.
It can be helpful to compare your new home with properties being resold online. Compare the property’s value to yours.
This will give you an idea of what your property can be sold for in the near future.
It might have a covenant.
Some properties built on land with covenants can also be problematic for homeowners, as these can often be restrictive. For example, buying a section 106 property will have restrictive covenants, which can prove to be problematic.
Some covenants may even prevent homeowners from adding an extension to their home or a satellite dish.
It could be a leasehold.
Always verify with the developer before buying an off-plan property.
You may be surprised to learn that even though you have purchased the property, the freeholder is still leasing the land to you for a few years. Most leases were between 99 and 120 years long, although usually for a long time.
This can hurt the property’s resale value as buyers might be discouraged by the restrictive nature of leasehold properties.
Ask the developer before you buy the property off-plan. Often, leaseholds have ground rents or maintenance fees that can rise over time.
Tips for buying off the plan
These tips can help you avoid potential pitfalls when buying an off-plan property.
- You can research the developer online and read other people’s opinions on forums.
- To see the work’s quality and craftsmanship, visit the developer’s other websites.
- Talk to the developers. You may be eligible for a ‘buying-off-plan’ discount if you are near the end of your financial year or if there are still a few properties to be sold.
Asking questions when purchasing property off-plan
- What amount of deposit are you willing to put down?
- Is my home comparable to the one shown in the brochure?
- What is the construction time? When can I move in?
- Is there any buying-off-plan or incentive discounts?
Mortgage lenders can mortgage off-plan properties.
Lenders may be less cautious in lending to off-plan mortgage borrowers in the UK because new properties, including newly built flats, are notoriously difficult to resell.
This is a risk for a lender. To get their loan money back, a lender may have to repossess the property and resell it if you default on your mortgage payments. Lenders lose money if the property isn’t sold or sold at a lower price than the loan.
This can lead to lenders having strict affordability criteria that may limit your options.
There are, however, specialist mortgage lenders who will lend to an off-plan property built in the UK.
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What will the property type have on a mortgage for an off-plan house?
Lenders should be cautious about lending money to mortgages for non-standard construction because it can have an adverse effect on the property’s ability to sell.
Specific property types may be challenging to maintain or repair and require specialist workmanship and materials. This can cause future buyers to be discouraged.
Some lenders may have issues with certain buildings, such as:
- Homes constructed with prefabricated Steel
- Flats above shops
- Properties made from timber
- Apartments on the 5th or higher floor
- Houses with thatched roof
- Homes built with corrugated iron
Some homeowners find it challenging to keep up with their mortgage payments and maintain their homes. In some cases, they end up in arrears.
Lenders could be forced to repossess the property and inherit the costs of repairing and selling it.
Some lenders are more inclined to accept a variety of property types. This section explains more.
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A mortgage to finance a buy-to-let off-plan purchase
Investors looking to buy to rent can take advantage of off-plan discounts by purchasing off-plan.
Off-plan and new build mortgages will likely require a specialist lender, as buying off-plan and unique properties have higher associated risks.
Off-plan purchases are a way to invest in a vision, not a finished property. Some lenders may be hesitant to lend money to such an investor because of the potential for a property’s value to drop before it is built or the possible delays and complications that could occur during construction.
Lenders will require a more significant deposit to obtain off-plan mortgages. This is due to the perceived risk. A buy-to-let mortgage requires a minimum of 15% deposit. However, some lenders may require up to 35% off-plan.
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Talk to an expert today about buying off-plan
Enquire today to discuss the property market. We have specialist mortgage brokers regulated by the financial conduct authority here to get you the best mortgage deal.
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FAQs
Stamp Duty is there a charge for an off-plan property?
Yes. The usual stamp duty rate is applicable.
What time do you need to pay the deposit on an off-plan property?
After you have been approved in principle for a mortgage and received a mortgage valuation, you will need to deposit money to the developer to secure the plot. The minimum deposit is typically 5% of the property’s worth, but this can vary from developer to developer.
Is it possible to buy an off-the-plan property with shared ownership?
Potentially yes. Developers offer Shared Ownership mortgages for buyers who want to buy a home off-plan.
You, the buyer, would be able to buy a portion of the property through shared ownership. The developer would own the remainder.
This mortgage is more affordable for first-time buyers as it requires less money.
What is an off-plan mortgage assignment?
An investor can buy an off-plan contract and resell it for a profit. You would need an assignment mortgage.
A mortgage off-plan assignment allows you to purchase an off-plan contract before the completion of the property.
Investors will be happy to know they can sell the off-plan property before the build is complete. This allows them to avoid stamp duty and land registry fees.
Is there any tax benefit to buying off-plan?
As stated above, a specialist investor can avoid paying Stamp Duty by buying off-plan and then selling the contract before the property is completed.
If you aren’t sure you can purchase and resell the property before the completion date, this is not a reason to buy off the plan. After the property is completed, the keys have been exchanged, and the contract has been signed, the buyer is responsible for the stamp duty.
What can a mortgage advisor do to help you?
Buying an off-plan property can be difficult if you’re unfamiliar with the process. A mortgage advisor can help you avoid making mistakes that could delay your application, and an advisor can help purchase the off-plan property.
The mortgage process can be streamlined.
A mortgage broker can guide you through the entire off-plan mortgage process from beginning to end. They will take the time to research and find the best off-plan mortgage lenders.
How to manage your paperwork
After you have found a lender willing to lend you a mortgage, there may be time constraints, and you might only have 28 days to exchange. Some mortgage lenders may find it difficult to process applications in this timeframe.
A mortgage advisor is a great resource. They will prepare all the paperwork for you and submit your application as quickly as possible.
This will help speed things up so that the lender has 28 business days to complete the application.
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Negotiating
Our advisors have extensive knowledge of mortgages for off-plan properties. They also know the best developers to offer the best incentives.
They can negotiate the best rates with off-plan lenders to save money and ensure you get fair terms and rates.
Calculating your deposit
A mortgage advisor can also review your financial situation and calculate the deposit you will need to buy off-plan with any lender.
Brokers can also help you compare incentives between developers and determine which one is more affordable and how much money you can save by buying a house off-plan.
Flipping
Good brokers will talk with you about flipping. This refers to the potential profit you could make if your property’s value rises before completion.
London Off-Plan buying
Investors will often consider purchasing off-plan properties in London to make a quick profit after completion.
It may be easier to “flip” in areas with high demand for properties and many people, but this is not always true.
Flipping an off-plan property can be a risky investment because there’s no guarantee the property’s value will rise or decrease.
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