Faced with challenging market conditions, housebuilders are offering ever more tempting incentives on new homes in a bid to attract buyers. Is it all too good to be true?
What would you say if I offered you the keys to a brand-spanking new property for £99? And then gave you a 5% deposit, paid your Stamp Duty - and handed over £1,000 to pay your mortgage and legal fees?
Chances are, you would be very tempted, wouldn't you?
This is the sort of incentive desperate house-builders are offering to potential buyers at the moment. But are such incentives really what they are cracked up to be?
What's on offer?
New-build incentives at the moment include anything from moving fees, to a free car, holiday vouchers, cash back, stamp duty payments, home furnishings, and mortgage payments.
Taylor Wimpey is offering a scheme where if you can put £99 down and reserve your new home, the developer will pay your 5% deposit, your stamp duty, £500 towards your legal fees and £500 towards your mortgage fees.
Meanwhile, Barratt Homes will buy up your old property so that you can buy one of their brand new homes. They will also pay up to £1,000 a month towards your mortgage until January 2010, with the added bonus of no estate agents' fees to pay or HIPs to arrange.
What's wrong with incentives?
Incentives make it difficult to assess the true value of the property.
If, for example, you had bought a home for £250,000 and the incentives totalled £25,000, then you are actually only paying £225,000 for the property. And so is everyone else who buys one. So, no matter what the developer says the property is worth, in reality no one has actually paid more than £225,000.
After all, the developer wants to achieve the best possible prices for the properties: it's unlikely that big incentives would be offered if the properties could sell easily without them. By offering incentives - no matter how great they sound - the developer is simply dropping the price.
What's more, there's a risk in this market that not all the properties will sell. And the first thing a developer in that situation will do is to offer bigger and better incentives, of course. This means you could easily find that neighbours with identical homes have paid far less than you, de-valuing your property, too.
So, you should always find out whether you will be one of the first buyers in that particular block of new flats or new housing estate before you buy a new-build property, and how many remain unsold.
New rules
Because it is so difficult to assess the value of a new-build home, mortgage lenders see these properties as riskier than other types of properties.
Lenders have therefore become more cautious when it comes to new build properties, requiring bigger deposits than usual from borrowers.
In September, the Council of Mortgage Lenders also introduced new measures to ensure all builders or developers of any newly-built property declare all incentives upfront. This means lenders will discount any incentives and based the mortgage valuation on what you actually pay for the property. (So in the example above, the mortgage valuation would be £225,000, and if you need a 20% deposit, you'd need 20% of £225,000.)
Effectively, these new measures render most incentives worthless. The exception is when you get an interest-free loan from the developer as an incentive. In this situation, you are going to have to cough up 100% of the property price sooner or later, so it is not a discount.
Are interest-free loans a good idea?
Interest-free loan incentives work like this: the developer offers to fund 25% of the property's value through an interest-free loan. So you buy 100% of the property, but only pay upfront for 75%. You then repay the outstanding 25% either when you sell or transfer the property to a third party in the future, or at the end of 10 years, whichever is sooner.
Sounds like a good deal? This loan is marketed as interest-free, and certainly, there's no set annual interest rate. But there's usually a nasty sting in the small print: you will have to repay 25% of the market value of the property at the time of selling or remortgaging, and not the original purchase price.
So, if your property goes up 10% in value over the next 10 years, the size of your debt increases by 10% too. And vice versa: if your property decreases in value from the price you bought it at, so does your debt - but then, this is probably not much of a silver lining.
What're more, you won't actually know how much you will have to pay back until you come to sell up or the term of your loan has finished - a very worrying thought indeed.
The value of incentives
If you're buying a home with incentives, it's vital to sit down and add up the total value of all the incentives you are being offered and how much you will actually be paying for the property.
Remember, your mortgage lender will be taking all of these incentives into account and will assess your mortgage offer on this basis.
You then need to ask yourself whether you would be happy paying for the property at its true value if the incentives had not been offered. If your answer is no, then you should steer clear.
Remember, don't view these incentives through rose-tinted glasses - they are not anywhere near as fantastic as they seem.
Find your ideal mortgage with The Fool
More: The Best And Worst Properties To Own | Avoid This Property Peril!