Could someone explain how a house purchase allowance works please?

spinnaker

Hi,

I am in the process of buying a new build 2 bedroom flat. I managed to negotiate a 5% deduction on the property which is being classed as an 'allowance'.

Could some explain how an allowance works please? Which one of the following is the way it works?

1. I pay the full price of the flat and then when the funds are transferred only 95% of the funds is actually transferred from the mortgage company to the builder.

2. The 5% reduction is applied to the total purchase price and the contract reflects this same lower purchase price.

3. I pay 100% of the funds and then claim back the 5% from the builder after I have 'completed' and received the keys to the property.

I am just not sure when the 5% reduction gets applied really. Does it always work the same way? I hope the above makes sense. Thanks in advance for your help.

Chaz

irnbru_2

spinnaker wrote:

3. I pay 100% of the funds and then claim back the 5% from the builder after I have 'completed' and received the keys to the property.

That would be my guess. That way, prices remain inflated.

Edit: question was answered in OP.

spinnaker

Hmm, I thought that would be the case too, but it sounds more like option 1 according to my solicitor. I was wondering if there was a standard way that this is done.

* scratches head

Madjock

The fact that this is an allowance and not vendor deposit, means that the mortgage co believes you are paying the full asking price, as otherwise, they would only lend you the 95% you are paying. I think it is up to your solicitor how they deal with the funds, and option 1 is eminently more sensible than option 3.

spinnaker

Thanks for the help madjock, I think that is probably the case too.

Richard_Webster

The transfer deed may well quote the full price and you may have to pay SDLT (if applicable) on the full amount but at completion only 95% is sent by your solicitors to the builder or its solicitors.

Your solicitor will have to tell your mortgage lelnder about the allowance so they willhave to be happy about it. If I was a mortgage lender I wouldn't have this - I would take the view that if the builder is making an allowance of 5% then the place is only worth the figure less the allowance. (Most new builds are overpriced!). That would mean I would lend whatever my maximum percentage was of the 95%!

Happily for you a lot of lenders will accept these "allowances", but the point still needs to be checked with them. Not telling the lender is mortgage fraud!

As a conveyancing solicitor I believe the information given in the post to be useful but I accept no liability except to fee-paying clients.

spinnaker

Thank you Richard, that is exactly the sort of answer I was hoping for. Thanks also to madjock and irnbru too.

MJMum

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spinnaker

Thanks MJMum, I think you are right.