Risks related to new builds

James Sherwood-Rogers is managing director of Quest

I was pleased to recently read that the CML is in talks with the House Builders Federation in a bid to identify ways of increasing loan-to-values on new build properties to help the market build momentum. (http://www.mortgageintroducer.com/ccstory/240250/5/CML_working_with_builders_to_raise_LTVs.htm).

With reports of mortgage lenders effectively getting their fingers burnt on new builds when the market was at its peak, it is no surprise that lenders continue to be cautious. 

If you look at multi-million pound ‘Cube’ development in Birmingham as one example, the apartments today are reportedly worth 20% less than the original agreed off-plan prices from 2006.

The difficulty here however is that many placed deposits when the market was reaching its peak, yet the completion of the development was subsequently delayed due to the economic conditions affecting the developer’s scheduled completion. 

The knock-on effect is that those individuals who originally placed deposits are now required to complete the purchase at the original 2006 valuation.  Yet, the lender’s mortgage valuation will of course vary greatly in today’s market.  A significant dilemma for buyers, investors and banks alike.

So this begs the question, what constitutes a new build? If the build of a property started four years ago was halted due to the recession and has since completed this year, does this still fall into new-build territory? And how can lenders and developers work closer together to reduce risk, yet ensure buyers are able to access mortgage funds for such properties? 

It’s an area that needs addressing, though is likely to raise as many questions as it does answers.