From October new rules require housebuilders to make lenders aware of incentives offered to buyers - the idea is to ensure a mortgage offer is based on a true valuation of a property
Down valuations, a problem for all housebuilders, are not just a product of the economic climate but also a product of lender uncertainty. It is vital for all builders that lenders see the value in the newbuild product, which in part stems from lenders seeing transparency in the valuation process. Valuers are driven by lenders, after all they pay their fees.
The Disclosure of Incentives Form (DIF) introduced in 2008 was designed to give lenders increased confidence but in recent years builders have developed others methods of incentivising buyers in a difficult market not covered by the original form.
If a lender is not aware of the true value of incentives or suspects that it might not be then it cannot assess the value of the property
On 1 October 2011 the Council of Mortgage Lenders (CML) introduced a new DIF that must be used from this date. All builders and developers selling newly built property which is to be occupied or purchased for the first time, or converted or renovated property that has not been occupied in its current form funded by a mortgage are required to fill in the new DIF.
As CML stated the new form was introduced “in response to evolving marketing practices by developers, and to make the wording of the document clearer. It is designed to ensure that any incentives offered to buyers by developers are clear to lenders, so that firms advancing mortgages have a reliable view of what is being paid for the property”.
The form has been updated and expanded to reflect market conditions, with emphasis being put on disclosure of schemes such as shared ownership, equity loans and part exchanges. The form has also been amended to ensure that all arrangements in relation to cases involving options to buy, third party payments and finder’s fees are also disclosed.
The main amendments to the form are:
- Question 3: The information provided for assisted purchasers has been expanded and it is now a requirement to provide the name of the party or parties retaining/providing the equity, the name of the scheme and confirmation of any re-sale restrictions. Details of the loan (if shared equity) ie the repayment terms must also be provided.
- Question 5: Any introductory/finders fees must be included, this includes details of the recipient(s) together with the fee agreed.
- Question 6: Details as to the number of units (if any) being sold by, or on behalf of, an investment company/investor.
- Question 8: Details of any luxury or non standard shared amenities eg access to a gym
- Question 11: On a part exchange, details of fees payable to third parties or selling agents.
- Question 13: Details of the standard to which the property was constructed in relation to sustainability - however, this question is optional.
So is this a procedure designed to prohibit commercial innovation and make the lending process more difficult? The short answer is no - lenders just want builders’ and developers’ incentives to be transparent. If a lender is not aware of the true value of incentives or suspects that it might not be then it cannot assess the value of the property for lending purposes. In such circumstances valuers will down-value a property to take into account such unknown factors whether or not they exist.
Making sure that a mortgage offer is based on the true value of the property helps reinforce lenders’ confidence in the market for newly-built property, which has fallen due to recent experience of losses and frauds.
So is it all good news? Well, not quite. The DIF can cause delays to transactions. Conveyancers are under a duty of care not only to the purchaser but also the mortgage lender and it is their duty to inform the mortgage lender of any incentives that have been offered. If a DIF is received late or is amended this can cause delays. Incentives need to be approved and lender queries need to be dealt with at an early stage rather than last minute or on the day of completion itself.
To assist, a copy of the DIF can be supplied to the purchaser upon reservation of the property. This can be supplied direct to the lender with the purchaser’s mortgage application ensuring that full disclosure of all/any incentives are made at the start of the process. This can reduce the risk of a mortgage offer being withdrawn or amended half way through the conveyancing process.
It is hoped that the new DIF will ensure that lenders once again begin to have confidence in the valuation process and a renewed confidence in the market for new homes. When initially implemented the managing director of Heritable Bank, Adrian Scott, said: “Mortgage lenders need to be able to rely on the valuations of property that they receive, and recent incentives to purchase newly-built property have muddied the water here, making the task of surveyors more difficult.
“Heritable Bank welcomes the CML proposals. We call upon developers to confirm their support for this scheme.”
Linda Storey is a partner in Penningtons Solicitors
This article was originally published under the headline ‘What’s it worth?’