New build - Market downturn risk?

NewBuild21

I have a dilemma and wondered if the collective minds of the MSE forums might be able to help with it. 

TLDR:  Buying off plan in a falling market, anything we can do to protect ourselves from the drop in prices?

There is a new build estate being built in a location that would work well for us, the show homes aren't up yet but we went and viewed the same house type on another of their developments and really liked it.  We've been looking for a couple of years (after a relocation put us into a rented property) and have offered on a few 'sensible' houses before but nothing has stuck.  This is the first time we have both been excited after a viewing. 
We have been told that the plot we like has been the most popular (though as yet unreleased), I'd normally take this with a pinch of salt as I was expecting an upsell but that never came, instead they just commented we should keep an open mind about other plots if we failed to secure it.

The finances are tight for the initial purchase but doable, as we have rental properties elsewhere we will have to pay the additional 3% SDLT and to get a good mortgage deal on our income multiples, our advisor has suggested a 25% deposit would lock in the better rates.  We can do the above, but it will be close with only circa 1% of the property price left in our savings on completion (that includes us continuing to save between now and then).

The issue is specific to a new build property, I've been told that we pay a reservation fee now and then exchange IE are contractually obliged to purchase at the agreed price, after 28 days.  The mortgage valuation is then undertaken once construction is complete, in this case 9 or 10 months away but this doesn't affect the price you have agreed to pay.

If house prices were to fall between now and then, we would still have to meet the purchase price and this is making me incredibly nervous.  I've read that if we pulled out we would lose our deposit (our life savings) and the builder could still take legal action for the difference between our price and any subsequently agreed price.

We haven't got a contingency, our other properties have long term tenants and are at the maximum loan to rent ratio, so there's no capital available there. 
If we had to increase the purchase LTV because the price had fallen (say 5 or 6%) it could double the interest rate on the mortgage.  We could afford this in the short term but are also at an age where if we want to start a family we need to get on with it, my wife earns a lot more than I do and it might be too much of a stretch financially for her to go on maternity leave with such a high mortgage payment.  A choice between losing your life savings or never having children is a pretty rubbish decision to have to make!

If the price falls slightly after we have bought it and fixed in the LTV / mortgage payment I'm not overly concerned as we plan on staying in the house fairly long term but it's this gap between exchange and completion; our local market already seems to be softening, reductions and things coming back on the market months after initially selling.

Does anyone know of anything we can do to mitigate the above?  
I wondered about trying to negotiate with the builder, something like 'if the valuation is reduced by 5% or more of the price agreed, the builder will meet our stamp duty costs'.  This would free up some cash for us to maintain the LTV.
  
Alternatively if anyone could offer up a perspective or any contractual protection we could try and get put in?

Seashell517

They want you to exchange without a mortgage offer in place? That seems like madness... My current house is a new build. I reserved in May, but the house wasn't due to be finished until Dec, so nothing happened until around August (the sales guy acknowledged that with mortgage offers valid for 6 months the 28 day to exchange was ridiculous relative to release date and anticipated build completion). I think exchange was in October in the end, mostly because the builders solicitors were rubbish but a bit because of my buyers issues getting a mortgage... Even then in the end the house wasn't ready until February, so I had to get my mortgage offer extended. That was stressful enough. 

NewBuild21

Sorry if I've muddled that, mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

davidmcn

NewBuild21 said:

mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

That sounds unusual - are you sure you've got that right? Generally lenders would do a desktop valuation at the outset before offering, not leave it as a last minute surprise.

moneysavinghero

If you are worried about house prices falling then don't buy. You are in a much better situation than most people. You have two incomes and already own several other properties. 

Not sure where you are getting the Lose house savings OR  never have kids decision from.

If prices rise by 5% will you be giving the builders a bit extra?

If prices do fall, will you be letting your tenants know that you will actually be charging them less that the amount they signed up to because you are a nice chap like that?

You want the best plot on the site. Who do you think they are going to give that to? The guy demanding all sorts of contract clauses, or the person that's happy to sign the contract as is?

pinkteapot

davidmcn said:

NewBuild21 said:

mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

That sounds unusual - are you sure you've got that right? Generally lenders would do a desktop valuation at the outset before offering, not leave it as a last minute surprise.

Agree. Has a specific lender told you that's what they'd do? It leaves you open to an insane risk as you've exchanged contracts yet you could very easily lose your mortgage offer. 

That's always a risk to some extent with new-builds as given the long timescales involved there's more risk of losing your job and therefore mortgage offer between exchange and completion... But I've never heard of a valuation being done after the build is complete. Also, you usually exchange with completion on notice, and when they house is built the builder gives you notice of 10-14 days to complete (which you must do). If your lender insists on doing a valuation during that time will they guarantee to be able to do it within the deadline?!

Angela_D_3

Its a given that new builds cost a premium and you pay for the unused newness of it all.  

Seem to be hard to sell too,  in my searches,  everything has been snapped up bar two new builds 

In 15 years time I’ll probably buy new when im leaving feet first and dont have to worry if its gone up or down but that’s the only circumstances id consider a new build.  

NewBuild21

davidmcn said:

NewBuild21 said:

mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

That sounds unusual - are you sure you've got that right? Generally lenders would do a desktop valuation at the outset before offering, not leave it as a last minute surprise.

It was brought up by the mortgage broker, it wasn't something I'd considered before that. I found many articles like the ones below when I started researching the point and that's what has caused my concern.   I've posted the source and a rough description if anyone wants to check them, I'm new so I can't put the direct address in.

Thisismoney - Buying plan - How to purchase property haven't seen.

'Santander said: ‘We would value based on the specification and future build and would value the property again when it has completed.' 

Home owners alliance UK - advice - guides for homeowners - new build conveyancing explained.

'The major issue here for buyers is that mortgage lender property valuations are usually undertaken at the beginning of a new build and after construction is completed. If property prices fall within that period therefore, and the buyer is unable to secure a mortgage for the remaining balance (due to a perceived reduction in security for example), then the deposit will be lost due to breach of contract.

In addition, the housebuilder can also sue the buyer for the difference between the agreed price and the lower price it subsequently achieves at re-sale, as well as any legal fees incurred. Many experts urge prospective buyers to establish if the contract price is ‘locked’ at exchange therefore and, if so, what happens if prices rise or fall before completion.' 

Go compare - mortgages - new build 

'If the property value falls before your home's completed, it may not provide the mortgage lender with enough security.

Lenders will carry out a valuation of the property at the beginning and the end of the build - note that the amount they're prepared to lend could change if the valuation does.'

The guardian - money - 2010 - property off plan investors

'Off-plan buyers caught out by falling prices can lose more than just their deposit, says Graham Norwood

Developers are taking legal action to recoup millions of pounds from individuals who bought new flats "off-plan" before the downturn, and now cannot get mortgages to cover the full cost.

Many buyers are walking away from deals, accepting lost deposits. But some developers pursue them to fulfil their contracts or to pay damages. In London alone there are about 300 legal claims against defaulters by builders including Berkeley Homes, Ballymore and Telford Homes according to Estates Gazette.'

NewBuild21

NewBuild21 said:

davidmcn said:

NewBuild21 said:

mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

That sounds unusual - are you sure you've got that right? Generally lenders would do a desktop valuation at the outset before offering, not leave it as a last minute surprise.

It was brought up by the mortgage broker..

Apologies about the formatting on that last post, it all went a bit wonky when I removed the links and I can't see a button to edit.

AdrianC

Don't forget that it's a double-edged sword. You're also protected against price rises...

And there's a simple solution - don't reserve and exchange so early.
Sure, that carries a risk that somebody else will beat you to it...

davidmcn

NewBuild21 said:

davidmcn said:

NewBuild21 said:

mortgage offer would be in place at exchange but subject to valuation once construction if finished. 

That sounds unusual - are you sure you've got that right? Generally lenders would do a desktop valuation at the outset before offering, not leave it as a last minute surprise.

It was brought up by the mortgage broker, it wasn't something I'd considered before that.

I suggest you talk to them again to clarify. Like we've said, it's not how things usually happen.
Some of the issues in those articles are because of mortgage offers expiring before completion (or never existing at the point of exchange), not lenders changing their minds about valuations during the life of the offer.