How much will a new build cost if you fall for a freebie?

With mortgage lenders cautious about anything less than two years old, Laura Howard finds developers resorting to desperate measures to attract buyers

It's common knowledge by now that mortgages are much harder to come by than they were this time last year. But the new-build section of the housing market has been hit particularly hard as lenders tighten their criteria for what is seen as a more "risky" type of property.

BM Solutions last week reduced its maximum loan to value (LTV) from 85 to 75 per cent of the selling price of new-build apartments, while Scarborough building society went a step further, insisting on a deposit of at least 30 per cent.

Other lenders are more cautious still. Coventry building society insists on a staggering 50 per cent downpayment on all new-builds. And if the new home is for buy-to-let investment purposes, the risk is too great altogether for lenders such as the Chelsea building society, which has pulled out of this market.

"Prospective purchasers of newly built properties, particularly flats, may well find lenders less willing to part with their funds," says Darren Cook, head of mortgages at financial analyst Moneyfacts. "Although exact definitions as to what constitutes a 'new build' vary from lender to lender, typically it is a home that has not previously been occupied or is not more than one to two years old."

The knock-on effect that stricter criteria are having on housebuilders is plain to see. Last Wednesday, Barratt Developments announ-ced a 33 per cent drop in sales agreed each week, compared with this time last year. Another housebuilder, Redrow, has just reported a spate of job losses, blaming this on a 50 per cent fall in the number of reservations for new homes compared with a year ago.

Desperate times call for desperate measures. Fair-view Homes, for example, is offering "the ideal solution to help first-time buyers get on to the property ladder" with its "Move in Free" promotion. The housebuilder promises to pay the equivalent of a 5 per cent deposit, to cover the stamp duty and legal fees – and even to throw in some cashback too.

Its rival George Wimpey will pay "half your mortgage for the next two years" (well, the interest – and as long as it doesn't exceed 6 per cent) if you reserve a home this month from a selected development.

But buyers should approach such arrangements with caution. Consumer groups have accused some developers of over-inflating valuations to an extent where the "freebies" may be nothing of the sort. For example, if the incentives add up to £10,000 and the home is valued at £150,000, it may actually be worth only £140,000 or even less.

This is making lenders nervous about new-build homes, says Melanie Bien, director at Savills Private Finance: "They have been caught out by inflated valuations in the past, and the housing market downturn is now exacerbating the problem."

With prices continuing to fall – by a further 1.3 per cent in April, according to the Halifax – this situation can only get worse.

"Generous" incentives aren't just targeted at first-time buyers. Barratt Homes currently has a part-exchange offer for people finding it difficult to sell in the dampened market. It will buy your old home if you purchase a new one from one of its latest developments. However, the new property must be at least 30 per cent more expensive than the one you are selling – and the valuations will be arranged by Barratt. You will also need to have a mortgage of less than 90 per cent LTV.

Whatever the incentives, prospective buyers should remember that, in today's market, they are the ones holding the cards, says Lynsey Sweales, director at mortgage broker The Money Centre – especially if they've done their research. "Check what similar properties in the area are selling for and speak to local estate agents with no connection to the developers," she advises. "You have a bargaining tool to try and secure an even bigger 'discount', which you should not be afraid to use."