Buying a new home is a big decision, and usually you’d want to see it in person before you commit. But what about “off-plan” homes – where you buy before they’re even finished? This type of purchase is becoming more common, but there are some things you need to be aware of before taking the plunge.
Last year, almost a third of new homes – that’s 32% – were snapped up off-plan, according to property experts Hamptons. This is good news for builders as it keeps their cash flowing, but is it always the best deal for buyers?
Let’s break down the pros and cons of buying off-plan.
What does “buying off-plan” actually mean?
In a nutshell, it means buying a property, whether it’s a flat or a house, before it’s actually finished being built. This could be as early as when it’s just an idea on paper, or during the construction phase.
Don’t worry, you won’t be expected to make a decision based on blueprints alone. Developers often have “show homes” – these are completely finished versions of the planned properties, giving you a feel for the layout, design and the surrounding area.
Some developers even let you customise certain aspects, like the colour scheme or even the furniture, so your new place is ready to go from day one.
Can I get a mortgage on an off-plan property?
The short answer is yes, but be prepared for a bit more scrutiny from lenders. Mortgage providers tend to be more cautious about lending on new builds for a couple of key reasons.
Firstly, new builds often come with a higher price tag compared to older properties. Secondly, they can be harder to resell, which worries lenders who need to be sure they can recoup their money if you default on your mortgage.
This means you might face stricter lending terms than if you were buying an existing property. For example, some lenders might exclude new builds from special offers, like low deposit mortgages.
Another hurdle is that many lenders will only approve mortgages on new builds from developers registered with specific bodies, like the National House Building Council (NHBC). This is to ensure the property is built to a good standard.
What are the benefits of buying off-plan?
One of the big draws of buying off-plan is the potential for profit. If the property market goes up in the time it takes to build your home, you could find yourself sitting on a property worth significantly more than you paid for it. This is known as “price appreciation”.
Let’s say you buy a property off-plan for £250,000, and during the building phase, average property prices jump up by 10%. Congratulations! You’re now living in a home worth £275,000.
Off-plan buying is particularly popular when property prices are on the rise, and data from Hamptons confirms this trend.
Another perk is that developers often sweeten the deal with incentives, like covering your stamp duty or contributing towards your deposit. These offers can be very attractive, especially for first-time buyers looking for ways to lower the upfront costs. However, be aware that these incentives might impact how much you can borrow, as some lenders cap the amount of incentives they’ll take into account.
While buying off-plan does come with risks (more on that later), you do get more protection than you would buying an older property. Most new builds now come with warranties that last around 10 years. This means you’re covered if any problems arise due to shoddy design or construction.
Mortgage lenders usually insist on these warranties being in place and backed by a reputable provider, like the NHBC or Premier Guarantee. This safeguards both you and the lender against major structural issues.
What are the risks of buying off-plan?
Despite the warranties and potential upsides, buying off-plan is often considered riskier than buying a property that’s already built.
One of the biggest concerns is the developer going bust before your home is finished. If this happens, a liquidator is brought in to handle the company’s affairs. They may try to sell the contract to another builder to complete the project, but this isn’t guaranteed.
If your deposit has already been used to fund the initial construction, you might not get it back. To protect yourself, it’s crucial to clarify how your deposit is being handled and whether it’s protected.
While some warranties offer deposit protection, it might only cover a portion of it, leaving buyers who put down larger sums at risk.
Other, less dramatic but still frustrating, risks include delays in completion and the final product not matching the developer’s promises.
Delays can be particularly troublesome, especially if your mortgage offer is time-limited. Make sure to check the expiry date of your offer and whether it can be extended if construction is delayed.
There’s also the risk that your lender might not value the property as highly as the developer once it’s finished. This could leave you in a difficult position, unable to borrow enough to cover the full purchase price.
Keeping a contingency fund can help bridge the gap in such a scenario. While you can request a mortgage offer that’s dependent on you securing the mortgage, it’s not very common for developers to agree to this with off-plan properties.
If the finished property is smaller than advertised, you should be entitled to a price reduction proportionate to the size difference.
In conclusion
Buying off-plan can be a great option for some, offering potential financial gain and a brand new home tailored to your preferences. However, it’s essential to weigh the risks carefully and take steps to protect yourself.
Make sure you understand the terms of the contract, check the developer’s credentials, clarify deposit protection, and factor in potential delays. Don’t be afraid to ask questions and seek professional advice from a solicitor or financial advisor to make the most informed decision possible.