New-build properties at risk of negative equity
Buyers of new-build properties may have paid more than the true value
and could be at risk of negative equity, lenders have warned.
Trade body the Council of Mortgage Lenders has called on the industry to crack down on issues in the new-build market
that put both businesses and borrowers at risk.
This warning is echoed in tonight’s Panorama, screened on BBC1 at 8.30pm, which investigates whether house prices are being kept artificially high by dodgy valuations, builder deposits and fraudsters.
Builder or developer incentives, where buyers are offered incentives such as cashback or the payment of a deposit to encourage them to make a purchase, are a cause of concern for mortgage lenders because they make the real value of new homes less transparent.
Buyers who have accepted an incentive must disclose this to their lender so it can be taken into account in the valuation and the mortgage offered. But in reality, many buyers don’t tell their lender. This pushes the valuation higher, and can often reduce the size of the deposit needed.
While this may seem attractive to some buyers, the risk is that they could find themselves with a mortgage worth more than the value of the property - especially in a slowing market. If they decide to sell the property, at its true market value, then they might be at risk of negative equity.
The Council of Mortgage Lenders says incentives are rife across the new-build market and have led to a disproportionate increase in the number of frauds perpetrated against new-build flats located in city-centres.
Rapidly rising house prices have encouraged incentives but despite the tide turning and the housing market cooling down, the CML says it doesn't expect to see an end to this practice. In fact, a slowing market is likely to increase the number of incentives offered to buyers, because developers will be keen to shift properties and meet sales targets.
Premium price tags
Another problem with new-build properties is that many attract a premium price tag of around 5% because they have not been lived in before. When house prices are rising the likelihood is that the second hand value will meet or exceed the new-build premium.
But in the current market there is a real danger that the second hand value will not keep pace - again leaving buyers at risk of negative equity.
The CML is also concerned about fraudsters who significantly inflate the values of properties. They do this by setting up “shell” investment companies to buy new-build apartments in bulk and at a discount.
The scammers then sell the properties at a much higher price, pocketing the difference.
Matt Smith, a senior policy adviser at the CML, says: “This type of transaction is not in itself fraudulent, but it becomes fraudulent where the initial transaction is hidden, and where the purchaser is either completely fictitious or is complicit - ‘a mortgage mule’.”
The danger to the buyer is that they end up paying too much for a property. When they come to sell then there is a risk that they might not be able to make their money back.
What is the solution?
As a buyer you must tell your surveyor or lender about any builder deposits or incentives that you have accepted on a purchase. This will allow them to work out the true value of your home and will protect you against any overvaluation.
When buying a new build property, shop around to ensure you aren't paying more than the property is actually worth in the current market. As house prices are cooling, buyers are in a better position to negotiate prices so don't be afraid to make an offer below the asking price if you think it is too steep.
If you do make an offer, then make sure you get a full survey done to ensure you aren't paying more than the property is worth.
And remember to do a background check on the developer selling you the property to make sure they are a reputable firm.
The industry is also working to ensure that valuers consider the effect of any sales incentives which could have had a distorting effect on the agreed sale price.
However, because of the risk some lenders have reduced the loan-to-values they will offer on new-build properties, factoring in the unknown incentives, while others have stopped lending on new-builds altogether.
It is not yet clear whether buyers are struggling to secure mortgages on new-build properties. But if the issues are not resolved then this could spell problems for people who want to buy a new-build home.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.