Posted on 8 July 2013 by
Imagine that you are buying a brand new car direct from the dealer. You’ve taken it for a test drive and meticulously researched the pros and cons of the car. You’ve spoken to your bank and searched online for finance, and you have found a deal that suits your needs and is affordable. Feeling somewhat pleased with yourself you march into the dealership office and you negotiate a competitive price. Just as the salesperson hands you the forms to sign they suddenly throw you a curveball. “Of course”, says the seller of said car, “that discounted rate is only valid if you use our chosen lending partner at a rate and fee that they deem fair; otherwise you will have to pay full price”. Time to stand up, walk out, and go and buy the same car elsewhere.
The car anecdote is a great example of what is increasingly happening in the new build housing market, with developers pulling the metaphorical chassis from under buyers at the last minute. The problem here is that, unlike our vehicular analogy, you cannot just drive to the next developer down the road and buy the same house from a different house builder.
At John Charcol, we have seen a marked increase in clients being forced to use a builder’s preferred solicitor and mortgage broker when completing a transaction, especially if an incentive has been offered. Therefore instead of having the whole of market to look at, a client is forced into using one broker for probably the biggest financial decision of their life.
Clearly not every developer does this, although as a client you will always be asked to speak to their dedicated mortgage broker initially. The difference is that some developers will insist that you use their brokers, others just recommend it. But how is a developer allowed to insist that you use their finance professionals? Well, the answer is they are not, unless an incentive is being offered. These incentives come in various forms, including an offer to pay 5% of your deposit; cover your stamp duty or legal costs; or having different flooring put in at no extra cost.
Typically these incentives will work out to be around 2 – 5% of the value of your home. However, it is important to note that these incentives need to be declared to the lender, as usually a valuer will reduce the value of the new home by the amount of the incentive. Therefore a property priced to sell at £400,000, with a 5% deposit paid by the developer, will be reduced to £380,000 by the surveyor. And because the value of the house is reduced, your potential mortgage amount will be reduced as well. Not really looking like much of a decent incentive now are they?
Bearing this in mind, is it worth being restricted to one mortgage broker or one solicitor for the sake of the incentive? Especially if that broker does not have access to the whole mortgage market and charges an excessive fee (of which a proportion will probably be paid back to the house builder as a referral fee).
As a consumer you would not accept this cartel arrangement in any other area of retail, so why should you when buying your biggest investment?
I recently saw a client who had negotiated a price on a new build house, with free flooring as an incentive thrown in (worth up to 2% of the value of the house). The developer was insistent that they use their own mortgage broker, who was charging potentially up to 1.5% of the mortgage amount as a fee; and they did not even have access to the whole of the market, just a restricted panel of lenders. However, my clients pushed back against the developer, and with the intervention of our very own Ray Boulger, the house builder soon saw sense and allowed my clients to make their own choice for their mortgage broker and their solicitor.
So the moral of the story is that just because a developer wants you to use their professionals, often to generate further income for themselves via referral payments, do not give in. Remember that the developers want to sell as much (maybe more) than you want to buy, so dig your heels in. And, if you need some backup, call one of our mortgage experts, and we can help fight your corner.
Power to the people, not the builders.
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