What is incentive disclosure?
ASK THE EXPERT
A. This is all to do with lenders’ concerns over the tendency of some house builders to offer substantial incentives on new-build properties.
Now, the basic idea behind these incentives is hardly new – nor is it by any means confined to the property sector. Besides, during the boom years, banks and building societies were perfectly happy to turn a blind eye to such practices.
But things change, and in the wake of the credit crunch, as hard-pressed developers kept upping the ante, lenders became increasingly concerned. And understandably so, since every pound offered in incentives is effectively a pound off the value of the property they are being asked to lend against.
It was therefore decided that there needed to be full disclosure of any incentives being offered, in order that lenders could more accurately calculate the size of any loan they were prepared to advance. Hence why, 3 years ago, the Council of Mortgage Lenders (CML) introduced their Incentives Disclosure form, which buyers’ solicitors must lodge with the lender before any funds can be released.
Interestingly, this form was superseded by an updated version on October 1st this year – which suggests that the CML has found it necessary to tighten up disclosure even further.
Obviously, if you need – and are hoping to get - a high loan-to-value mortgage, then the fact that lenders take incentives into account could come as a bit of a shock, since it could mean that you have to find a larger deposit than you were bargaining for. That is something you will need to take into account.
On the other hand, if you have the necessary funds, and you don’t require a mortgage of any kind, then it shouldn’t bother you in the least!
Nevertheless, it is just worth emphasizing that this is no mere formality. Obviously, all reputable developers will comply. But if a lender were subsequently to discover that some incentive or other had not been properly declared, they would be perfectly within their rights to terminate the loan at any time. And that could be a very unpleasant surprise indeed!