Published: 05:04PM BST 04 May 2012
The NewBuy scheme is aimed at credit worthy buyers who could afford the monthly repayments on a mortgage for a new-build property, but simply cannot get a large enough deposit.
Although Council of Mortgage Lenders (CML) figures suggested that overall mortgage lending was up 20% year-on-year in February 2012 and first time buyer numbers were also up 8% on the previous month many maintained that this increase was due to first time buyers rushing to complete their house purchase before the end of the stamp duty concession in March 2012 rather than a general resurgence in the housing market.
Many commentators expected first time buyer numbers to fall off again now the stamp duty holiday has finished and that seems to be borne out by new figures from the Nationwide building society suggesting that house prices dropped by 0.2% in April, with the Land Registry for England and Wales also saying that house prices had dropped slightly in March. Figures from the Bank of England confirmed that the brief rise in mortgage lending at the start of the year has come to an end. Hence the timeliness of the government's NewBuy scheme available to anyone considering buying a new-build property in England only.
The NewBuy scheme is aimed at credit worthy buyers who could afford the monthly repayments on a mortgage for a new-build property, but simply cannot get a large enough deposit (typically around 30%) together. Despite the publicity surrounding its launch, there appears to still be some confusion about how it will operate, so here is brief explanation of the salient points of the NewBuy scheme.
What is it meant to do?
NewBuy is aimed at anyone (not just first time buyers) who is thinking of buying a newly-built home but does not have a large enough deposit to qualify for a regular mortgage. Most lenders are reluctant to offer much more than 70% of the purchase price (known as loan-to-value – LTV) of a property at present, meaning a buyer has to find a deposit of at least 30% from their own pocket.
NewBuy offers the possibility of applying for a mortgage of 95% LTV to buy a newly-built house priced at up to a maximum of £500,000. As a purchaser you will still have to find a deposit equivalent to 5% of the purchase price yourself and will still have to meet the mortgage lender's eligibility criteria based on income and credit scoring as you would for a regular mortgage.
How do I buy a property under NewBuy?
If you have a deposit of between 5% and 10% and meet the mortgage lender's affordability requirements, you may be able to buy a newly built home under the NewBuy scheme. You can deal direct with a participating NewBuy developer, approach a mortgage lender who is part of the scheme or talk to a mortgage intermediary or IFA who is introducing mortgages under the scheme. Further information is available at the Council of Mortgage lenders website or the Communities & Local Government website. You can find a list of participating builders/developers and search for properties that qualify for NewBuy by region on the official NewBuy website.
At the time of writing, (30th April 2012) the lenders who have confirmed their participation in the scheme included: Barclays, Nationwide, Halifax and NatWest. The developers who've signed up include Barrett, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey, although take note that some developers are linked only with specific lenders.
What are NewBuy's criteria and exclusions?
The scheme applies in England only and to qualify for NewBuy, buyers must be UK citizens or those with a right to remain indefinitely in the country. Qualifying properties have to be:
- New build residential properties – NewBuy does not apply to anything other than newly built properties being sold for the first time priced up to £500,000 - there is however no cap on your income to qualify for the scheme.
- Bought in full ownership - NewBuy does not apply to properties bought using interest-only mortgage products and it will not be available for shared ownership or shared equity purchases. (Government backed affordable housing shared ownership schemes are available under separate initiatives and you can find more information about those here.) It is also not possible to use NewBuy in conjunction with any other publically funded mortgage scheme.
- Your main home – NewBuy cannot be used for the purchase of second homes or as an investment purchase or for buy-to-let purposes.
What is the mortgage indemnity and does it protect me?
Some people are aware that a mortgage indemnity component is involved in NewBuy and believe this has benefits for the purchaser/homeowner. However, the mortgage indemnity is additional security and protection for the mortgage lender only and does not protect the property purchaser.
If you were to fall behind with your mortgage payments and the lender repossessed the property, this could lead to the house being sold for less than the outstanding balance of your mortgage. Under the NewBuy scheme, the builder/developer puts aside a proportion of the sale price into a special mortgage indemnity fund to protect mortgage lenders. If this mortgage indemnity fund runs out, the government steps in with a further guarantee to protect the mortgage lender to an agreed level. It's from this indemnity fund that the lender would recover some of the loss they might incur when they sell a repossessed house.
The mortgage indemnity would not protect you (the purchaser/homeowner) from possible negative equity (the sale price of your house being less than the amount owed on the mortgage) and would not shield you from the threat of repossession.
The health warning with normal mortgages that 'your home may be repossessed if you do not keep up your mortgage payments' still applies to NewBuy. If your home is repossessed you would still be responsible for repaying any remaining shortfall between the sale price and any outstanding amount owed on your mortgage if the lender has been unable to recover the full amount of the shortfall from the indemnity fund.
Getting legal advice
If you do purchase through NewBuy, you will also still need to appoint a solicitor for conveyancing (the legal requirements involved in buying or selling any property). As with any 'normal' house or property purchase you are not limited to the firm or solicitors that the developer or lender may suggest as part of a 'package' or imply that you have to use. You can appoint the solicitor of your choice to do the conveyancing.
If you are interested in buying a property and want to find out more about what's involved, contact our conveyancing team today.