New Build Warranty Insurance

What is New Build Warranty Insurance?

A tailored form of structural warranty insurance, new build warranty insurance provides a comprehensive plan of financial protection for building projects for developers.

Where a standard buildings insurance policies covers damage caused by external events (such as floods, fires, or accidental damage), new build warranty insurance provides support relevant to the original construction of the building - providing essential backing and financial stability for developers.

While it is similarly vital for single builds, new build warranty insurance comes into its own when developers work on multi-home developments.It is an essential cover when constructing larger developments, such as housing estates.

With the UK government’s focus on building affordable homes, new build warranty insurance is an essential form of financial backing where selecting a suitable provider becomes crucial to safeguard investment and meet regulations.

Perfectly positioned with established relationships with top-tier structural warranty providers, Clifton Private Finance offers the very best rates and most comprehensive insurance possible.

The Key Features of New Build Warranty Insurance

New build warranty insurance offers:

Comprehensive Coverage - Full new build insurance protects against a complete range of possible construction faults, including such things as unexpected cracks in foundations leading to subsidence, leaking roofs that cause spreading water damage, and ineffective insulation causing inflated energy bills.
Extended Warranty Protection - With complete coverage lasting 10 to 12 years, new build warranties cover the building for ample time, ensuring the property is fully insured for the entire first decade of its use, during which time almost all latent structural defects will become known.
Regulatory Compliance - Inspections at keystone points during construction ensure that all relevant regulations are met, as well as providing substantial reports to meet any lender requirements to secure development funding and mortgages.
Building-Locked Ownership - New build warranties are tied to the building, rather than the construction company, and are transferred automatically to new owners. This increases buyer confidence and market value.

The Value of New Build Warranty Insurance

For Developers

When building multiple homes, developers face catastrophic financial risk from latent structural issues, especially if problems don’t surface for years.

Problems from substandard construction materials that have been used across multiple sites, for example, can present a scenario of financial ruin for a developer lacking comprehensive warranty insurance.

Not only that, but new build warranty insurance also provides:

Improved Marketability

Buyers of new builds will look to warranties to provide the guarantee that should anything hidden prove a problem, there is the financial backing required to efficiently solve that problem.

Houses lacking new build warranty insurance can struggle to sell, with replacement insurance or warranties difficult and expensive to put in place at a late date due to the difficulty in establishing a trustworthy construction history and thus, evaluating risk.

Increased Reputation

Developers who obtain new build warranty insurance as a matter of course are seen as responsible and professional, upholding high construction standards. Confidence improves for both buyers looking for a new home, and lenders providing funding for future projects.

Strengthened Legal Position

With insurance in place, expensive legal disputes are significantly lessened - and often eliminated entirely.

For Buyers

Many buyers see purchasing a new home as a risky endeavour. While houses that have been lived in are seen as ’settled’ and unlikely to develop faults that are due to the construction, new builds are an unknown, especially those innovating with cutting-edge designs or utilising new materials.

For those buyers, the new build warranty insurance provides:

Insurance Cover for Defects - Homeowners can rest assured that any problems that do occur won’t leave them with unexpected repair bills.
Ongoing Peace of Mind - With ten years of cover, owners can be confident that anything that is going to go wrong will show itself before the warranty expires.
Resale Value - Should the time come to sell on, the new build warranty ensures that a secondary buyer (and their lender) will also have the confidence they need to take on the property.

How New Build Warranty Insurance Impacts Lenders

Developments are rarely funded entirely through existing business capital. Lenders and investors play an important role in ensuring that large-scale, multi-property developments take place, and for those lenders, evaluating the project’s risk level is essential.

New build warranty insurance is critical for developers looking for development finance to fund a project for several distinct reasons.

Reducing Risk

New builds present investors with a significant amount of risk, especially within the construction and structural integrity of the building. For a lender who relies on the building as a tangible asset for collateral, the worry that the asset may literally collapse considerably impacts risk assessment.

Structural defects can also lead to very high repair costs, both in terms of materials and labour. Development firms facing these repair overheads, especially if replicated across a large multi-property project, may default on finance repayments or even find themselves facing liquidation.

It is essential that lenders provide capital only for projects that are a reasonable risk. New build warranty insurance shifts a large portion of that risk from the construction firm (and thus, the lender) to the insurance underwriter.

This makes funding construction projects viable and also presents a more favourable risk portfolio, lowering the long-term cost of finance packages for the developer.

Facilitating Buyer Mortgages

It is not just the primary project lenders and investors that look to mitigate their risk when providing funding. The buyer’s mortgage lenders will also want to know that the investment that is being made by their customer (and, by extension, themselves) is viable.

Buyers will find it extremely difficult to secure a mortgage on a new build property that lacks a warranty, turning them away from uninsured new builds to seek alternative options. For developers, this means having new build warranty insurance in place is vital to obtain enough interest in properties to maintain an expected market value, make profit, and ultimately sell on the completed homes.

Improving Overall Project Viability

Costs and profit margins have a significant impact on the viability of a construction project as a whole. If the rates offered by lenders are too high, or the expected sale price of a finished home too low, then the overall calculated return on the project may simply render it not worthwhile.

Even at a very early evaluation stage, new build warranty insurance plays a part in adjusting these figures to prove project viability in theory.

With a warranty in place, planners can expect to attract competitive lending interest rates and terms, with higher LTC (loan-to-cost) / LTV (loan-to-value) ratios; while calculating return based on increased property market valuations.

How New Build Warranty Insurance Works

Application

Obtaining new build warranty insurance is done by the developers prior to beginning construction. The developer submits a package that includes detailed information about the builders and their credentials, and thorough construction plans for the development itself. Once these are approved, the warranty process is begun and the developer can move forward.

Inspections

To make sure that new build warranty insurance is as comprehensive as possible, the construction phase includes regular professional inspections to evaluate the three main focuses of the warranty:

Design
Workmanship
Materials

At key stages during construction, these inspections ensure all relevant standards and regulations are being met. Any potential issues that are flagged at these essential checkpoints can be resolved before work continues, aiding in a smoother construction process.

Approval

A final thorough inspection occurs once the build is finished. Once the insurer is satisfied that everything has been completed as expected, the new build warranty is issued.

Defect Liability Period

The defect liability period is a term of typically one to two years, during which the responsibility for fixing any issues remains with the developer, and not the insurer. Full coverage begins once this defect liability period is passed successfully.

This is to lower the risk for the insurer and to protect them from any possible fraudulent activity.

Warranty Excess

New build warranty insurance will include an excess amount that may be different depending on the type of defect (a defect due to poor workmanship may have a separate excess to one due to design issues). The warranty owner will have to pay this excess as agreed in the warranty terms and conditions. When obtaining new build warranty insurance, either initially or due to transference, it is important to be fully aware of any excess amounts.

Transference of Warranty

When the building is sold, the new build warranty transfers automatically to the new owners. All relevant documentation must be provided to them as part of the property sale.

Making a Claim

Should a latent defect occur that falls under the remit of the new build warranty, it should be reported immediately to the insurer who will evaluate the issue and pay appropriately for repairs, minus the excess amount which must be paid by the warranty owners. Note that if the warranty has been transferred due to sale of the property, that excess responsibility is with the current owners, not the original developers.

In some circumstances, such as a substandard materials defect being flagged by a homeowner, contacting the developers to make them aware of the wider issue that may affect other properties is advisable. Developers are then able to take action involving both affected homeowners and the insurer to ensure that this and potential future issues are dealt with as early as possible.

Late-Stage New Build Warranty Insurance

Full new build warranty insurance is designed to be part of the development of the building from an early stage, with the plans for the buildings part of the risk assessment before any physical construction has begun. However, in some circumstances, developers may come to the decision to include new build warranties later in the project, with work already underway.

In these situations, it is possible to get the new build warranty insurance, however it is more complicated and the terms are likely to be less favourable than if it had been arranged during planning:

Inspections - As preliminary inspections may have been missed, an additional thorough professional inspection will need to take place as soon as possible. This will incur an additional cost and may be a minor disruption to current work.
Records - It is important for the insurer to assess all work that has been completed, which will mean evaluating the documents and records that have been compiled to that point, including any photographs of the construction and interviewing personnel.
Meeting Standards - It is essential that work has been done to meet all construction standards thus far and the evidence of that will have to be provided. This could include architectural and engineering plans, building control certificates, and photographic or video evidence of key stages.
Exclusions - With some parts of the construction potentially impossible to assess, such as buried foundations, there may be exclusions in the final warranty.
Strict Conditions - Some areas may not be fully excluded but may have tighter conditions regarding the cover to protect the insurer and mitigate risk from claims on areas that were not able to be fully inspected.
Costs - The cost of a late-stage new build warranty is typically greater than if it had been applied in the typical fashion. Risk for the insurer is considerably higher and premiums will increase accordingly.

With the greater costs and difficulty in providing the relevant evidence to get full cover, while a late-stage warranty application is possible, developers should build warranty applications into their standard operating process. If you’re in a position where late-stage new build warranty insurance does have to be applied for, you should:

Act quickly - Any further delays will increase the difficulty and costs of the warranty, so don’t delay.
Work with an expert - Speak to us at Clifton Private Finance. Our specialist structural warranty insurance team can help you get the best possible deal, with the most comprehensive cover. We have established relationships with premium structural warranty providers that can smooth your application and get things moving faster.
Prepare for inspections - There may be a flurry of activity with multiple site visits and detailed questions from surveyors who will be looking to get a full evaluation of the project to make sure it meets all necessary standards.
Check lender requirements - It could be that your lack of warranty is causing you problems with lenders, or worse, that you are inadvertently breaking the terms of your financing. Clifton Private Finance are experts with property development finance. Our debt advisory team will be able to work hand-in-hand with you to smooth any funding issues or find alternative funding partners that understand your situation.

Despite the difficulty and costs of getting a new build warranty midway through construction, it is often worth undertaking. Remember, a new build warranty will:

Provide lender confidence to improve the chances of a mortgage for your buyers
Add value to the property
Ensure it meets all regulations

Obtaining a Professional Consultant Certificate (PCC)

A Professional Consultant Certificate (PCC) is another option if a full new build warranty cannot be obtained. These after-stage construction guarantees, also known as Architect Certificates, can provide either 6-year or 10-years of insurance coverage similar to a warranty.