Builder's Loan - Risks / Rewards?

C22DTJ

Hey all,

My partner and I are looking to buy our first home. We ideally want a small house, 2 bedrooms, parking etc, but unfortunately we live in a rather expensive area; Stratford-upon-Avon (and would rather not relocate since we both work close by and the surrounding areas aren't much cheaper).

We've managed to get together deposit of around £25k and have been looking at properties around the £130-150k mark.

We've looked into some of the first time buyer schemes and shared-ownership, although a few of the providers/agents have suggested our deposit is a bit high and encourage us to purchase smaller shares of the property (presumably so they can earn more rental income).

We looked at a great house today that's slightly out of our budget (£170k) but we were offered something called a 'Builder's loan' which I'd never heard of. I assume it's got a more formal name but I'm not sure.

Basically, the home builder (it's a new house) would put up a 10% loan to add to our mortgage+deposit enabling us to buy the house. We'd then pay the interest only on that loan at 3.5% fixed for 10 years. After 10 years (or presumably at any point prior) we would need to pay off that 10% loan in a lump sum, the 10% is based on the value of the property at the time of repayment, not at the time of taking it out.

Now, in the short term, this seems favourable since that interest rate is slightly lower than what we've talked about with the mortgage provider (currently around 3.9%). However, that lump sum concerns me obviously.

Does anyone know any more about this kind of loan, or can advise on whether it is/is not a good idea.

Many thanks

bigadaj

The loan is obviously additional debt that you will need to repay at some point. What might be of more concern to you is that these incentives are often discounted by a lender, ie they may well come back and value the house at 160k. This will mean you are effectively paying a Premium for the new house, your deposit will be a lower ltv percentage and were you to sell in the next couple of years, assuming flat house prices you would get back less than you paid.

In the longer term you are taking some risk with house prices, ie if they rise you pay the builder more.

Simplistically any scheme that isn't a straightforward 100% purchase has issues associated with it,whether builders incentives, shared ownership etc

C22DTJ

Thanks Bigadaj.

I just spoke to the developer again this morning, it seems I misunderstood the terms.

Apparently, it's not an equity loan, rather just a 10% loan from the builder which is fixed at 10% of the initial sale price. So; if the loan is £17000 now, it'll be £17000 in 10 years time.

This is slightly more favourable based on the estimation that house prices will rise in the coming 10 years but obviously that may or may not happen.

Could you elaborate slightly on 'builders incentives', forgive my ignorance, I'm just not sure exactly what you mean.