Self-employed and buying a newbuild? Here’s how to avoid “dodgy” developer tactics
Buying a property is probably one if not the, largest financial commitment you will make. So, what should you do if you are in the market to buy a swish newbuild property and developers are breathing down your neck to exchange contracts? Brokers express their concerns about this tactic and when its best to secure a mortgage and exchange.
The self-employed have to go through so many more loops to get a mortgage so they don’t need the additional pressures of developers, but that’s often the case. New build property developers are increasingly putting pressure on prospective buyers to exchange contracts within a 28-day period yet with no completion date being set, according to Rhizome Media Group.
The news service said that quite often, the applicant’s mortgage offer then expires and they’re suddenly paying through the nose – or can’t afford the mortgage full stop, leaving them “out of pocket due to the exchange and out of home”.
Mike Staton, director of Mansfield-based Staton Mortgages, says this trend is especially the case now when some mortgage offers that were issued nine months ago at rates as low as 1.39% are having to be reapplied for at significantly higher rates, stretching affordability to the limit.
“This is completely unfair and the builders should be held accountable,” says Staton.
This type of pressure is looked down upon. Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com goes as far as to say it’s downright “dodgy”:
“This kind of dodgy practice should be made illegal. It’s made even more egregious by the fact many new build homes are sold to inexperienced first-time buyers.
Whilst an exchange many months ahead of completion is great news for the property developer, it potentially leaves the buyer on the hook for thousands of pounds. They could find themselves with a new, much more expensive mortgage offer, which ends up being unaffordable. The developer, of course, pockets the agreed non-completion fee. These unethical developers should be named and shamed.”Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com
Lewis Shaw, founder of Mansfield-based Shaw Financial Services believes new build developers are causing “countless issues” with their demands to force people into exchanging contracts within four weeks before putting as much as a shovel in the ground.
“To be able to exchange,” says Shaw, “buyers must have a valid mortgage offer, which is typically valid for six months. Problems arise when developers keep pushing back completion dates due to hold-ups in the build, often meaning that mortgage offers expire.”
She explains that this situation has the knock-on effect that, as brokers, either have to extend the offer or, due to mortgage product end dates, pick an entirely new deal.
“A year ago, that wouldn’t have made much difference. However, now that rates are shooting up mortgage offers that were at sub-2% prices are now almost double and close to 4%, coming as a big shock to buyers,” he says.
“Before they’ve even started their mortgage repayments, they’re being hit with rate shock at precisely the worst time. Worst of all there’s a chance they will no longer be able to secure a mortgage at all, meaning they’re out of pocket due to the exchange and out of home. It’s an issue that urgently needs addressing,” he warns.
Developers getting away with too much, here’s how to get them in line
Jamie Thompson of Manchester-based Jamie Thompson Mortgages says “what new build developers can get away with in this country is bewildering.”
Thompson says there is a simple solution to this though:
“At exchange, a completion date must be set. If the developer is not able to hand over a signed off property by that completion date any costs that are incurred by the buyer, such as rent, increased mortgage interest if the mortgage offer expires and storage of belongings, must be paid for by the developer.
If that happened, they’d soon get their act together. The whole set-up right now is geared towards the developers and can leave buyers out on a limb.”
Scott Taylor-Barr of Shropshire-based broker, Carl Summers Financial Services: “I have a case like this on my desk at the moment. The client’s completion date has been put back, put back and then put back some more by the developer. This is not uncommon at the moment as they are struggling for materials and labour.”
However, in a market of rising interest rates, this means that lenders are in turn struggling to maintain the rates previously offered to borrowers.
“The new build market and mortgage market are now deeply out of sync and it’s causing chaos,” says Taylor-Barr.
“We’re seeing build times that are far longer than many mortgage lenders are now able to hold applications and offers open for, which is a problem when builders are still insisting on exchange 28 days after reservation, even when they don’t think they will have the property built for nearly another 12 months,” he says.
Time is money
Imran Hussain, director at Nottingham-based Harmony Financial Services: says he personally had clients who have had to wait over nine months for a new build to be completed, and in that time, the mortgage product they originally had has doubled, hitting affordability for six and threatening the purchase.
“Exchanges should only take place when the property is built and when the transaction is near completion, just like a regular house purchase. Some form of regulation needs to be brought in for new build developers as currently they are a law unto themselves and are treating buyers with contempt,” says Hussain.
How to secure the best deal on your next mortgage as a freelancer
Thursday 8th September, 12:30PM – 1:30PM
As mortgage rates rise and fewer products become available on the market, what does this mean for the future of your mortgage plans as a freelancer or self-employed professional?
In association with IPSE, David Waters from CMME, will discuss everything that you need to know when securing your next mortgage deal including:
- Update on current mortgage and housing market and what the future holds
- How to get the best rate as a self-employed professional
- Should you consider locking in a new mortgage rate?
- The pros and cons of paying an ERC (Early Repayment Charge)
- Is now the right time to invest in a buy-to-let?
- What can you do start your mortgage application?