Mortgage Solutions asked brokers what advice they gave to clients to minimise risk when buying a new-build property, following reported worries of poor development quality and unfavourable leasehold contracts.
Brokers also raised concerns with the new-build sector agreeing that the market needed some intervention from either the government or the Financial Conduct Authority (FCA).
Conflict of interest
One reason cited by brokers was that clients were often encouraged to use mortgage advisers who have professional ties with development companies, raising the question of whether these advisers had the interests of the client or the developer at heart.
Jo Jingree, financial adviser at Mortgage Confidence, said friends had told her they were unable to use her services as they were required to use the broker provided by a developer, who often asked for higher fees.
“The developer and that broker may have a relationship that perhaps the client isn’t at the centre of. Buyers are told that is the broker they have to use, or they won’t get the property,” she said.
She added: “Often, it’s first-time buyers who are very vulnerable and they’ll use the broker a developer wants them to use, the solicitor a developer wants them to use and I wonder who’s looking after the client.”
Although Jingree said she had had clients “disappear” after they discovered they would need to use a developer’s broker, she said her issue was not the loss of business but rather the fact that “the developer is holding all the cards” in the transaction of a house.
“I think a lot is happening in the new build sector that should be dealt with by the FCA or the government,” she said.
As for solicitors who have a working relationship with developers, Paul Hampton, mortgage and protection consultant at Approved Mortgage Solutions, said their advice was sometimes “contrary” to advice he would give.
He said he would normally suggest clients get a homebuyers report on a new build instead of a basic survey, however the latter is what tends to be proposed by such solicitors.
“The problem we’re finding is new-build estate agents are telling clients that it saves money to have a basic survey done – most of the time it’s free and the house comes with new build guarantee. For a typical new build homebuyer, an extra £200 or £300 for a homebuyers report is a big ask.”
The brokers Mortgage Solutions spoke to also made mention of the pressure that was sometimes put on buyers to exchange within a certain time frame when it came to new build transactions.
Hampton said: “It’s amazing how it’s always ‘the last one on the plot’. As a buyer you never know if it’s a genuine statement or whether it’s a tactic to cause you distress and make you buy a property.”
Matthew Fleming-Duffy, director at Cherry Mortgage and Finance, echoed this saying: “I understand builders want to exit as soon as a development is complete but telling buyers ‘you’ve got 28 days to complete, where’s your offer?’ they can feel really panicked. It’s an unmanageable problem and I don’t know what the solution is.”
However, he acknowledged that introducing legislation could potentially put builders in financial difficulties as it may interrupt their exit strategies.
He said: “I do sympathise but what I see in practice with a lot of these transactions is the purchase mechanism is quite aggressive, so I sympathise a lot more with the consumer.”
Fleming-Duffy said because of this, he would try to steer clients away from buying off plan new builds, as not only might their situation and the market change before it’s completed but sales tactics often did not work in their favour.
“We get builders that won’t accept an offer from someone until they get a decision in principle, which is pointless when the property isn’t ready to buy until the next year. There are some lenders that offer a soft print decision, but there is a lot of turbulence during this kind of transaction because of the pressure,” he said.
Fleming-Duffy proposed the use of non-mortgageability clauses, something he said he often saw before the credit crunch, to allow buyers to pull out of a sale with minimal risk if their circumstances change or they find they are unable to get a mortgage due to lender oversaturation.
He added: “If the government stepped in and said for new builds, the standard should be to allow a non-mortgageability clause, that would put my mind at rest about talking to people now about something you can’t predict.”
No evidence of poor consumer outcomes
Mortgage Solutions contacted the FCA to see if it had any plans to intervene to regulate commercial relationships between intermediaries and developers. The regulator referred to its 2018 Mortgages Market Study, in which it concluded “there is little evidence” that such relationships lead to poor consumer outcomes.
However, the study urged firms to consider contract clauses which could potentially impact competition.
Hampton said while he was careful to make sure his advice would not be seen as investment advice; he would highlight the risk of a new-build property falling into negative equity before it increased. He said because of this, he would suggest a client go for a secondhand property depending on how long they planned to live in it.
Jingree said she advised her clients to pay attention to how lease terms were written as well as service charges, and warned them to be careful even if the home seemed like a good deal.
She added: “Often the new-build developers use their own solicitors and these things won’t be picked up, but an independent solicitor who has the client’s interests at heart will pick up lease terms that make it hard for developers to sell property.”