Stacey Bell is thrilled with the incentives offered by Fairview New Homes at its Modus scheme in Ipswich they helped her to buy a one-bedroom flat there and become a homeowner at just 19. “I paid £110,000,” she says (her father kindly went guarantor on her loan). “But the developer paid my 5% deposit for me, gave me £1,000 cashback and furnished the property with £5,000 worth of goods. It came with linen, cutlery even a cheese grater.”
Rather less pleased about the growing tendency of developers to entice buyers with thousands of pounds’ worth of goodies is the Council of Mortgage Lenders (CML). The mortgage industry’s trade body has declared war on the practice, complaining that incentives are distorting the new-build market and putting lenders at risk of losing money if borrowers default on repayments.
When a buyer applies for a mortgage on a new-build home, the lender values the property according to the prices fetched by other units in the same and similar local schemes all information recorded in the Land Registry. However, the stated sales prices, which are recorded on the contract and then on the registry database, often fail to reflect any incentives offered, giving a distorted impression of the local market.
In Bell’s case, the value of such enticements was £11,500 so really she received a 10% discount on the official price. The practice reflects the difficulties that developers are having selling in areas where there has been an overenthusiastic building boom. In one scheme down the road from where Bell bought in Ipswich, a repossessed two-bed flat has sold for £140,000 it had cost £279,950 when new 15 months earlier.
Underlying the practice is an unwillingness by developers to cut or, more importantly, be seen to be cutting their prices. The housing market is driven by buyers’ belief that their investment can only increase in value. For that reason, when the market, as now, is flat or declining, developers have to find another way of shifting their stock.
Take the “5% deposit paid” offer that has enticed many people onto the housing ladder. In reality, nobody is paying the buyer’s deposit: the developer is simply knocking 5% off an inflated asking price, but the buyer is still taking out a mortgage on the full amount.
Not all buyers are fooled by this sleight of hand. “I suppose you could say I’ve got a 100% mortgage,” says Bob Tile, 46, who has just paid £185,000 for a two-bed flat at Royal Oak Court in Fareham, Hampshire. As far as the developer, Economic Lifestyle, is concerned, however, Tile bought a £195,000 flat and it paid the £10,000 deposit to itself.
“We only offered the 5% deposit paid on a few of our plots,” says Russell Smith, sales manager at Economic Lifestyle. Tile, meanwhile, also got a better mortgage deal. “I took out a rate of 6.7%, fixed for three years. Had I been taking out a 100% mortgage, I would have been penalised. The best rates were 6.9% to 7.1%.”
Nor is it just a matter of cashback. Buy a flat at Darlee Gate in Hampshire, for example, and B&C Developments will throw in a £19,000 BMW or a “family package” that includes a 42in plasma television, two 20in sets, and a year’s gym membership.
Others, such as Bovis Homes, are offering shared-equity schemes that allow buyers to purchase 75% of a home initially and the rest in stages over 10 years during which time they pay far less than the market rent or the amount they would have paid in mortgage interest if they had bought the property outright.
When the market was booming, lenders seemed remarkably unconcerned about new-build overvaluations. Except, that is, for the Portman building society, which in 2005 (before its merger with the Nationwide last year) announced it would no longer lend on brand-new buy-to-let homes because of the problem. But with prices slipping and incentives increasing, more lenders are becoming nervous.
“The number of incentives on offer and the size of the discounts has increased,” says Bernard Clarke, a spokesman for the CML. “We are particularly concerned in cases where there has been a deliberate attempt by mortgage applicants to mislead as to the price being paid. In those cases, you are talking potentially about fraud.” To guard against this, and a general overvaluation of new homes, the CML has rewritten its Lenders’ Handbook the rules conveyancing solicitors must follow when handling the purchase of properties backed by mortgages. Now, they must disclose the value of incentives.
Part of the problem is that many lenders although typically charging buyers hundreds of pounds for valuations carry them out from distant offices, using databases, rather than surveyors with local knowledge. In Sunderland, a city with a negative equity problem, £150,000 flats have turned out on resale to be valued at £110,000. “They were sold to groups of investors and signed off by surveyors from outside the area, who didn’t bother contacting local valuers,” says Thomas Watson, owner of the eponymous estate agency there.
Exactly Warren like the Northern Rock - but errrrrm the speculative hedge funds and shareholders want errrrr bailing out?
Austin Tassletine, South West, UK
In the case of a gifted deposit, fraud is committed by the solicitor. Simple as that. By taking the deposit from the developer, adding it to the mortgage funds provided by the lender and giving it all straight back to the developer, the solicitor is defrauding the lender.
It is time the Law Society issued clear guidelines to stamp this practice out and make developers drop prices to gain sales - instead of trying to kid everyone all the time.
Mike Wilson, Winchester,
Warren Buffet's comment.
Could someone please explain his finance strategy. I have never seen "the less you pay for a high value asset, the more risk you take on" causality or strategy....so the better the bargain you find the riskier it is i.e. the less you paid below the market price the riskier it is?
I was too lost by that alleged causality i.e. as to why that would be a high risk investment, to even comprehend why a higher return was then justified. The last time I looked, the actual Warren Buffet buys distressed assets in as long as he can turn them around.
He does not buy into a falling [housing] market...he shorts only for hedging, not betting. He would therefore not touch the US or UK housing markets i.e. he would not see our housing market as an opportunity...he has attacked the excessively cheap debt that has funded this pyramid scheme.
Don't confuse a gross assets position, where most is debt, as being wealth. BTL seem to ignore the net assets position.
Raj, London,
Frank.. give it a rest! Yer avin a larf aint ya?
Ricky, Wandsworth,
I think it is a disgrace that educated professionals such as those quoted above, feel they can still cast their propaganda in order to talk up an already falling market.
The one question you have to ask yourself is how is what do these people have to gain from talking house prices up??
Andrew Ball, Plymouth,
"Deliberate attempts to mislead" originated with the developers, with the complicity of lenders. It is most disingenuous of the CML to talk of "fraud" as if anyone other than its members were responsible.
The end result is the house price crash that we are now witnessing:
- massive losses for people who bought stupidly overvalued properties (not just new builds) on the basis of false and inflated land registry house price figures
- massive shortfalls for investors who bought these mortgages from the lenders (e.g. pension providers)
Luckily it is not all bad, lenders are still finding ways to pay themselves insane bonuses.
William dB, London, UK
We don't offer freebies but we do offer a cheap, effective and real alternative to the typical 5-10% deposit required by developers on new build.Known as the Exchange Bond, this is a financial guarantee ( think insurance) given by a buyer to a seller at exchange to secure a property.
The premium is determined by the deposit amount required - say 10% - and the time between exchange and completion.On a £200,000 property, for example, the 10% deposit needed for a six month period would require payment of £20,000.Using an Exchange Bond for the same property and time period would cost only £725.00 plus a non-returnable £85 application fee with the full purchase price payable on completion.
More and more buyers and developers are recognising the benefits of using an Exchange Bond which is now the industry standard.More info at:www.exchangebond.com.
Frank Speight, Jt CEO,Exchange Insurance Company.
Frank Speight, London, UK
in situations likes this, the astute investor will find an opportunity, not a problem. Doom and gloom sells papers. I have made a significant proportion of my wealth from buying off-plan with y deposites paid, furniture packs included and companies offering to let and manage my investment.
Simple principle in finance, the less you pay for a high value asset, the more risk you take on. You are then compensated for the additional risk by high returns.
Warren Buffet Wannabe, London,