From Adviser Guide: New Buy Mortgages
Q: What are the pros and cons of NewBuy mortgages?
The rates on these products are lower than would be available for an equivalent mortgage at the same LTV on a property outside of the scheme, according to Nationwide.
Andrew Baddeley-Chappell, head of mortgage strategy and policy on the NewBuy scheme for Nationwide, said NewBuy has enabled lenders to offer mortgages at higher LTVs on new build properties than was previously the case.
Customers who purchase a new buy property under the scheme need to be aware that the price may include a premium for the property being new, he warned.
This may mean that the property initially falls in value when it is first occupied.
If the property is sold again shortly afterwards, Mr Baddeley-Chappell said the value may not be recovered and the next purchaser will be unable to access the same deals under the scheme as the property is no longer 'new'.
The scheme is intended to boost housing supply and improve access to mortgages to those who can afford repayments but do not have large savings.
Lenders will not relax their lending criteria, so Jayne Walters, press officer of the Council of Mortgage Lenders, said the risk of over-borrowing is not increased.
Ms Walters said the scheme will give builders greater confidence that mortgages will be available to finance the sale of properties they build.
She said: “This will create more jobs on building sites, and in the construction supply chain.”
The scheme will also enable lenders to advance a higher proportion of the purchase price without taking on the higher level of risk that would usually arise.
One of the key benefits of this, according to Ms Walters, is that the FSA has agreed that some large lenders will not have to hold as much capital as would normally be required for 90 per cent or 95 per cent mortgages.
New requirements on lenders to hold more capital for higher loan-to-value lending have restricted mortgage availability, particularly for mortgages of 90 per cent or more.
Capital requirements can also make these mortgages more expensive, warned Ms Walters.
From a consumer perspective, she said there were certain things to consider before taking out a mortgage on a newly-built property that represents a high percentage of the value of the property – between 90 per cent and 95 per cent in this case.
If the amount owed under the mortgage is greater than the value of the property, Ms Walters said the borrower would be in ‘negative equity’ which could make it difficult to move or remortgage unless the shortfall is met from savings or other sources.
However, she said this is a risk of high loan-to-value borrowing - where you borrow a large percentage of the value of the property - not just of the NewBuy scheme itself.