New builds- buy 75% of house now and 25% in 5 years.

sunnyhunny · 1 August 2008 at 11:32PM

Hi,

Several building companies in my area are trying to jump start sales on new builds with a scheme whereby the purchaser pays for 75% of the value of the home now and in 5 years time pays for the remainder of the equity at its valuation at the future date less any home improvement etc. There is no rent to pay over the five years or interest on the 25% equity.

Does this sound like a good deal or will it sting in 5 years? It seems like a good way for us to afford to move out of the slightly run down area we are in now and into a gorgeous new build for not much more in mortgage payments. But of course there would be a jump in payments in 5 years but would it be more than if we moved to the same house in 5 years time anyway?

Hope Ive described this clearly. Not sure how common this scheme is in other areas.

mewbie_2 · 1 August 2008 at 11:37PM

You should offer 75% and tell them to stuff the other 25%. New build house sales are suffering, hence the variety of offers - mortgage paid for a year, free this that and the other - anything other than do the obvious and honest thing.

REDUCE THE PRICE!!!!!

maninthestreet · 1 August 2008 at 11:42PM

sunnyhunny wrote: »

Hi,

Several building companies in my area are trying to jump start sales on new builds with a scheme whereby the purchaser pays for 75% of the value of the home now and in 5 years time pays for the remainder of the equity at its valuation at the future date less any home improvement etc. There is no rent to pay over the five years or interest on the 25% equity.

Does this sound like a good deal or will it sting in 5 years? It seems like a good way for us to afford to move out of the slightly run down area we are in now and into a gorgeous new build for not much more in mortgage payments. But of course there would be a jump in payments in 5 years but would it be more than if we moved to the same house in 5 years time anyway?

Hope Ive described this clearly. Not sure how common this scheme is in other areas.

You're gambling on being able to raise the 25% equity in 5 years time.

bo_drinker · 2 August 2008 at 12:03AM

We visited a new build site last weekend late Sunday afternoon, we were the 2nd couple the sales woman had seen that w/end. The same ish deal was on the table as well, they want rid at any cost and they will move heaven and earth to do it. She admitted the shells were being built and then left until deals could be done, not a lot left on her phase to sell so no panic there. I would imagine there is a lot elsewhere that will be on the shelf for a long while yet. Trouble is they can't do the right thing and reduce big time as they will drag a lot of the neighbours into negative equity so they p.ussy foot around it and hope for the best. What happens if it is the other way round and in 5 yrs the house is in negative equity will they pay you the difference? No... why ? because like you they can not get hold of a crystal ball that works.

Ms_Chocaholic · 2 August 2008 at 12:09AM

So if the property is only worth 75% of today's prices in five years time there'll be nothing to pay, is that right?

sunnyhunny · 2 August 2008 at 12:39AM

Thanks for the replies!

The house Im looking at is a lovely 4 bed detached house. Ive had my eye on this development for ages!

The builders have reduced the prices as well as offering this 75/25 deal. The December 2007 price was £325000 and now they are listed for £249500 so the 75% mortage price would be £187125. In 5 years we would owe 25% of the current valuation (based on the average of 2 independent valuers less any home improvements we have made). If house prices dont go up too much then I guess that would be good for us in this case!

I see this house as a forever house- unless we have triplets in the future or something like that I can see this house meeting our needs for a very long time indeed and so fluctuations in value at this stage may not be that relevant- except perhaps when shopping around for a mortgage deal.

I am a teacher and on a pay spine so its fairly easy to work out what I will be earning in 5 years time- my husband works in the NHS and is similar. I did a worked example assuming the property would increase in value by 25% over 5 years (in current climates perhaps very unlikely!) and it seens to be affordable assuming both of us can still work in 5 years and the are no disasters etc.

Im still in a pickle about it tho- thinking that Im missing a big catch somewhere!

neverdespairgirl · 2 August 2008 at 12:45AM

bo_drinker wrote: »

Trouble is they can't do the right thing and reduce big time as they will drag a lot of the neighbours into negative equity so they p.ussy foot around it and hope for the best.

I don't think they give a damn about the neighbours, they don't want lower selling prices on record.

PasturesNew · 2 August 2008 at 3:30AM

Some builders tried this in the last crash... come the magical day when your contractual obligation to buy the rest came about, people found they couldn't raise the additional mortgage that was needed and they were up poo creek without a paddle.

devils_advocate · 2 August 2008 at 7:28AM

sunnyhunny wrote: »

I am a teacher and on a pay spine so its fairly easy to work out what I will be earning in 5 years time- my husband works in the NHS and is similar. I did a worked example assuming the property would increase in value by 25% over 5 years (in current climates perhaps very unlikely!) and it seens to be affordable assuming both of us can still work in 5 years and the are no disasters etc.

Equally you have to work an example showing what would happen if the house declines in value by 25%. If you can cope with the above, you should be ok, depending on the mortgage situation.

You also have to be totally clear on what you pay for in 5 years time
–is it 25% of today’s valuation? In which case if prices fall by 25%, you won’t be able to get a mortgage for the extra.
–Is it 25% of the future valuation? So if prices fall 25%, it will be 25% of 75% of today’s value. Here, you also won’t be able to get a mortgage for the extra payment
–Is it the difference between the future value and what you’ve already paid, capped at a maximum of 25% of today’s value, as Mrs Chocaholic points out above?

Unless it’s the last one, which seems very unlikely, you’re stuffed in 5 years time!

Richard_Webster · 2 August 2008 at 12:42PM

It'll be 25% of the valuation at the time.

So you buy a house allegedly worth say £200K and take out £150K mortgage. You owe 25%. In 5 years time:

If the house is worth £300K then you will have to find £75K on top of your existing mortgage - total mortgage £225K -only 75% LTV (loan to value ratio) but will you have sufficient income to support the loan?

If the house is worth £220K then you have to find an extra £55K but that makes total borrowing of £205K - 93.18% LTV. Will a remortgage/further advance for such a high LTV be available then?

If the house is worth £180K then you have to find another £45K - that makes £195K borrowing - and negative equity, so you can't borrow it.

Therefore this is a highly dodgy scheme and I would never advise any buyer client to touch anything like this with a very long bargepole - it is far too risky.

Anyone buying a new house needs to think about how the house will be valued in comparison with other similar houses in the area that are perhaps 5-20 years old. In 5-10 years time will a buyer be that concerned that your house is only 5-10 years old when another, that is say 15 years old, is priced at £20K less? The differential builders put on because the house is new will not necessarily be sustained in the future. Builders try to make it difficult for people to make comparisons by building flats in areas that haven't had them before or imaginatively creating different house types like Town Houses or Link Detached that don't have immediate local comparisons so potential buyers get confused and pay over the odds.

guppy · 2 August 2008 at 1:05PM

Some people that did this featured in the 1995 episode of Panorama that was linked to here a few days ago. Watch it before buying:

http://www.bbc.co.uk/mediaselector/check/bristol/realmedia/092007/bs_panorama?size=4x3&bgc=C0C0C0&nbram=1&bbram=1

New builds- buy 75% of house now and 25% in 5 years.

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