A mortgage for a new build home: what to consider
If you’ve been lucky enough to win the draw procedure for a new build home, then congratulations! But before you let the champagne pop, what are the next steps to consider? A mortgage for a new build home is a different proposition from a mortgage for an existing house, and there are some things that should be taken into account.
Calculating your mortgage: 5 factors
With every mortgage application, including mortgages for new build homes, 5 factors are included in the calculation. These are:
- Your income
- The mortgage interest rate
- Your financial obligations
- The mortgage-to-gross-income ratio
- The market value of your property
Are you opting for a new build home? If so, please note there are a number of differences in comparison to a ‘normal’ mortgage application.
The sustainability level of your new home impacts the first 2 points. Virtually all new build homes are awarded the A energy label these days, which means that some lenders can lend you more than is normally permissible on the basis of your income. The mortgage interest rate can also be reduced sometimes on account of the energy label.
In principle, your financial obligations and the mortgage-to-gross-income ratio will not change. However, the fifth factor, the determination of the market value, is slightly more complicated.
The market value of a new build home
Since 2018, you can finance 100% of the market value of a home through your mortgage, as is the case with existing homes. The market value of a new build house is often calculated on the basis of the following 3 amounts (this can vary from lender to lender):
- Purchase/property contract price
- Additional work
- Loss of interest during construction
1. Purchase/property contract price
When you buy a new house, you sign what is known as a ‘purchase/property contract agreement’. This consists of 2 parts: the purchase agreement for the plot of land, and the building contract for constructing the house. The purchase price is paid via the solicitor to the developer of your new build project. The contractor is paid in instalments, as opposed to a lump sum. The first instalment of the property contract sum is usually paid directly at the solicitor’s office. The total purchase/property contract price is included in the market value of your home.
2. Additional work
Additional work entails any work that falls outside the standard construction plan as defined in the contract. The contractor performs this work to finish the house according to your personal taste. This can include work on the kitchen and bathroom, floor coverings, or the positioning of wall sockets. It may also include the plastering and painting of walls, or part of the garden landscaping. All this adds up, but it also helps to increase the market value of your home.
Does the extra work comprise more than 20% of the purchase/ property contract price? If so, there are lenders who may want to view a valuation report, to determine whether the value of your house will increase by the same amount.
3. Loss of interest during construction
In determining the market value, the loss of interest during the construction of your new home can also be partly included. To summarize, this constitutes the difference between the interest you pay to the lender, and the interest you receive on your down payment for your new build home. The loss of interest may not exceed 4% of the purchase/property contract price.
You can include this loss of interest in your mortgage to offset the cost of maintaining 2 homes. You will already start paying interest and making repayments on your new mortgage during the construction of your new home. Throughout this period (lasting 6 to 12 months on average), you will probably also incur expenses from your current accommodation.
At Viisi we recommend that you use your savings to pay for these double housing costs rather than taking out a loan, mainly because the interest on this part of the loan is not deductible.
The purchase/property contract agreement
You can add additional provisions to the purchase/property contract agreement, such as a terminating condition, enabling you as a buyer to withdraw, if you are unable to secure sufficient financing. In the case of new builds, the period for termination on the basis of financing is usually 2 months.
The contractor is also entitled to incorporate provisional clauses. One clause for example might stipulate that construction will only start once a certain percentage of the homes have been sold and/or once an integrated physical environment permit has been issued. These conditions may apply for anything up to 9 months. With such long-lasting provisional clauses, it will therefore be prudent to select a mortgage offer with a long validity period.
It is also advisable to draw up a list of extra work before signing the purchase/property contract agreement, to ensure your house is completed to your exact requirements.
Off to the solicitor
You will receive a letter to inform you when construction on your new home will start. It usually states that the provisional clauses have been fulfilled, and that construction can get underway. This is the time to sign the mortgage deed. From that moment on, the mortgage payments will start, and the house will actually be yours.
Construction deposit account for new build homes
The mortgage you take out covers the total value of your home upon completion (minus any monetary (down) payments on the property). From the moment of completion at the solicitor’s office, repayments and interest are due on the full mortgage amount. This includes the plot of land and the construction deposit account.
In the case of new builds, the property contract price and additional work are included in the construction deposit account. Until construction is completed, you will receive interest on the amount that is still in the construction deposit account. Often, the interest rate is the same as the mortgage interest rate, or 1 percent point lower.
Read more about the construction deposit account here.
Looking for tailored advice?
Every situation is different. If you are looking to find out more about a mortgage for a new build home, then our advisors are happy to help.