Question:

We are interested in making an offer for a new-build house. The developer is offering to pay our legal fees and stamp duty; it will also help with our deposit. My mortgage broker says that these incentives must be declared to the building society and that they will come off the price of the house when he arranges a mortgage. We are worried because he says that we would then not be able to borrow enough to finance the rest of the purchase. What is the position with these incentives?

Answer:

Incentives are becoming quite common in the depressed housing market — especially in the case of newly built properties or where the property is aimed at first-time buyers. These schemes have become so popular that many banks and building societies themselves offer to help with stamp duty and fees.

A housebuilder that is offering an incentive is effectively reducing the price of the property. If the notional sale price is £250,000 but there are incentives worth £25,000, the actual value of the house is really £225,000. A bank or building society needs to know about the incentive because it lends money based on how risky it sees a loan. Plainly, the lender needs to know how much you are paying for the property because this is an important factor in assessing that risk.

A lender can end a loan if a borrower fails to disclose any matter that might affect that risk calculation — a concept known as “material non-disclosure”. If you don’t disclose the incentive, the bank or building society could therefore pull the plug on your mortgage at any time.

Since September 1, 2008, the Council of Mortgage Lenders has specifically required all incentives to be reported in the case of newly built properties. The new regulations apply to any property that will be occupied for the first time or occupied for the first time in its current form (for example, new conversions into flats).

The new rules introduced a “Disclosure Incentives Form” that your solicitors will have to pass on to the bank or building society before it will release any mortgage moneys. Furthermore, if the developer offers any new incentives after the Disclosures Incentives Form is completed, this new information will also have to be passed on to the lender. Details of the regulations and a copy of the form are available on the internet: log on to www.cml.org.uk/cml/handbook/form.

You will therefore have to disclose the incentives offered by the developer, even if it does mean that you will not be able to borrow enough money to buy your dream house.

The writer is a barrister at Tanfield Chambers. E-mail your questions to:

brief.encounter@thetimes.co.uk

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