Beware desperate house builders bearing gifts

From a deposit paid to a year's free shopping, developers are pulling out all stops to woo buyers, reports Alessia Horwich

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The housing market has been crashing for well over a year, and no more so than in the new-build sector. Developers have had to be creative to get us to buy their new homes, throwing in thousands of pounds worth of extras as bait. However, incentives to buy new-builds are not always the best way on to the property ladder.

The housing industry has been busy offering cashback and financing deals as well as added extras to induce people to buy. Currently, most of the top developers are offering part-exchange deals whereby they will sell your old house if you buy one of their new properties. These are proving popular with buyers who are struggling to shift their houses in the current market. Other deals that are up for grabs offer to cover the costs of stamp duty, mortgage protection insurance, deposits, mortgage repayment subsidies for a set period of time and even membership of the local golf club or a year's free shopping at Waitrose.

Offers are tailored to the area in which each property is located and, essentially, to what the developer believes buyers want. If you can get the finance to purchase a new-build, you have a huge choice of incentives available to you. Steve Turner, a spokesman for the Home Builders Federation, says: "Once you've got a mortgage, you're in a good position and can demand a range of incentives because buyers need to sell."

This is fine if you have a good-size deposit. However, if you do not have the cash to get a mortgage, any deposit or mortgage payments offered by the developer will be of little use. This is due to a new transparency requirement introduced to the market by the Council of Mortgage Lenders. To restore lender confidence in the new-build industry, the council has introduced a disclosure of incentives form which must be filled out by all sellers of new-build properties declaring exactly what incentives they are offering the buyer at the time of purchase.

Before September 2008, developers did not have to declare what incentives their customers were receiving as part of the deal. This caused problems for lenders as they could not be sure the borrowers were putting their own cash towards the deal.

For example, a buyer could get a £100,000 mortgage and receive £10,000 cash back from the developer. They could then get away with putting the cashback down as a deposit on a 90 per cent loan-to-value (LTV) mortgage. Such large cashback incentives made it hard for lenders to assess the true value of properties. They didn't mind this so much when prices were going up but, in a falling market, every penny counts.

Since the introduction of the disclosure form, any extras thrown into a deal must be declared formally by the seller. This means the mortgage lender can see exactly what makes up the purchase price.

"The form provides a way for those on both sides of the fence – seller and buyer – to know the basis of the sale," Mr Turner says. "The lender knows exactly what he's lending money against. It's a guarantee."

However, the transparency means that, instead of lending against the official purchase price, the mortgage will be calculated against the purchase price minus the value of the incentives package. So in the example given above, a house with a £100,000 purchase price and a £10,000 cashback would be valued at only £90,000. A 90 per cent LTV mortgage application would thus raise only £81,000, so the buyers would still have to put up some of their own money.

Since the credit crunch, 100 per cent mortgages have disappeared from the market. Sue Warwick, the national sales and marketing director for the developer Miller Homes, says: "Mortgage companies are refusing to accept developers in effect paying the deposits for their customers – most now limiting us to a 5 per cent deposit paid, and some larger lenders not allowing anything at all. Certainly, with the vast majority of lenders, anything greater than 5 per cent will be stripped off the value of the property, despite a surveyor's valuation."

If buyers do not have equity or a cash deposit behind them, an alternative aid for purchasing a new-build is a shared-equity deal. David Hollingworth, a spokesman for mortgage brokers London & Country, says: "One of the things developers are starting to do as a direct result of the fall-off in the market is getting involved in the shared-equity market. This will increasingly be the case, and lenders are relatively comfortable with it." In effect, through shared ownership, the developer retains part of the property, offering this portion for sale to the buyer at a later date.

Although the current need to incentivise buyers is huge, freebies and extras are likely to survive the downturn. Dan Bridgett, a spokesman for Barratt Homes, says: "We've been offering incentives for a long period of time through all sorts of markets. Our incentives are designed to help people buy a property, regardless of the economic outlook of the country." Geoff Fricker, the head of corporate relations for online property agent rightmove.co.uk, says: "My sense is that developers will tailor a scheme or incentives to whatever the buyer wants. Right now, it's deposits and help with mortgage payments, but in the future it could be curtains or bathrooms." However it is only when (or if) mortgage lenders become more willing to lend out at higher LTVs that first-time buyers, and those with little equity behind them, will be able to take advantage of such freebies.

And no matter how much cash you have to put down, it's important to look at a deal objectively. As Mr Hollingworth says: "Don't be drawn in by the incentives. You've got to be paying the right price for the right home. Do your research and look at it as an overall property – not just one that comes with free extras."