Often in London, you might see a block of apartments under construction with an advertisement outside claiming a portion of the apartments has already been sold.
It might sound odd, but buying a property that hasn’t been built yet is common and is known as ‘buying off plan’.
Buying off plan took a nosedive in popularity during the UK credit crunch. Investors/homebuyers who had already bought an apartment off plan found that the properties they were buying had dropped significantly in value, sometimes as much as 35%. The mortgage offer would be withdrawn and the buyer would be down the value of their deposit – often tens of thousands of pounds.
Off plan purchases have made a comeback, however. This is thanks largely to the government’s Help to Buy equity loan scheme. The scheme offers a loan of up to 20% of the property value of a new build, or up to 40% loan if you are buying in London, enabling buyers to get a more favourable Loan to Value percentage and therefore access to better mortgage deals. You won’t be charged any loan fees for the first five years either, so when the scheme was introduced, buying off plan became much more appealing.
And why not? It has some great advantages. You buy directly from the builder and before the property is complete, meaning that you may be able to stipulate exactly the type of finish you want on the property internally, adding your personal touch from the start. However, there are factors you need to be aware of that could put your home and finances at risk.
First of all, you will need to make sure you’re well informed about what is and is not included with your build: are things like carpets or light fittings included with your purchase or are they extra? Then you need to make sure the builder/construction company you use is reputable and has insurance. If something goes wrong with the build and it isn’t finished, you’ll be able to get your deposit back if they have insurance. With that in mind, it’s a good idea to have a lawyer look over the contract to make sure it protects you. It might also comfort you to know that under the Consumer Code for Home Builders, you have the right to withdraw from a purchase with a full refund if the date of completion is delayed by more than six months.
When it comes to getting a mortgage, off plan can be tricky. You will likely need an agreed mortgage before settling on a deal with the builder, but lenders usually only hold onto their deal with you for 6 months and if the build isn’t completed by then you may lose your mortgage and need to start again. This is problematic if your circumstances change for the worst or one of you leaves work for whatever reason.
There is a confusing element in off plan purchases in that you sign a contract with the builder to pay a certain amount once the project is completed. However, if house prices drop during the development, for whatever reason, then you may not be able to get a mortgage against the value of the property. If that happens, you will have to put up more cash or drop out of the purchase, which will not only lose you your deposit but the builder can also sue you for the difference of your originally agreed price and the price they ended up selling at.
Of course, one of the most important things to ask is – if your property is part of a wider construction – will the other developments be finished at the same time as yours? No one wants to be living in a house where the entire apartment block/neighbourhood is being erected around them.
Lastly, while said construction is going on, we recommend that you visit the property regularly to get an idea of how things are coming along and get a better idea of what the property might look like upon completion.
When all is said and done, however, buying a New Build property can be a great benefit, enhanced by the fact that no-one else before you has lived in your property. Just go into any transaction with your eyes open and of course, get proper professional advice all the way through the transaction.