Mortgage lenders including the Halifax and Nationwide are backing a government plan to help potential homeowners. But the pot is limited
More details emerged this week about how the latest government scheme to help first-time buyers will work, with confirmation that major lenders such as the Halifax and Nationwide will be offering mortgages to those who qualify.
FirstBuy will allow people to take out a mortgage for just 75% of the cost of the property, provided they can stump up a 5% deposit, and will help more than 10,000 first-time buyers in England over the next two years, plus a smaller, unconfirmed number across Scotland, Wales and Northern Ireland.
However, it will only apply to newly built properties, which won't suit everyone, and with a limited pot of money, demand is almost certain to exceed supply ? especially in London, which has only been allocated enough cash to help around 940 buyers. The Midlands is getting the biggest slice of the cake, with enough money to help more than 2,400 people.
The scheme ? the latest in a long line of initiatives to help people on to the property ladder ? was first outlined in the budget in March, and this week ministers said more than 100 housebuilders will take part by offering their properties to first-time buyers, including Barratt Homes, Persimmon, Bovis and Taylor Wimpey. Four lenders have so far been named as backing the initiative: Halifax, Barclays, Nationwide and Melton Mowbray Building Society - though this could rise to as many as 20.
The first homes are expected to be available from September, while details of the specially designed 75% loan-to-value (LTV) mortgages that will be offered to buyers should emerge next month or in early August. In the meantime, wannabe first-time buyers can register their interest in the scheme now by contacting their local "HomeBuy agent".
FirstBuy will be open to those with a household income of less than �60,000 a year who can put down a 5% deposit ? though in London, the income threshold for families buying a home with three or more bedrooms looks set to rise to �74,000 from April 2012, to reflect the capital's higher property prices.
Those who qualify will be eligible for an "equity loan" worth up to 20% of the value of the property, jointly funded by the government and housebuilders on a 50/50 basis. That means buyers would be able to take out a 75% mortgage for the remainder. The equity loan will be interest-free for the first five years. At the start of year six, an annual fee of 1.75% will be levied on the equity loan, and this fee will then rise by retail prices index (RPI) inflation plus 1% after that.
When you come to sell your home (or after 25 years) you will have to pay back the equity loan in full. The amount you pay back will stay at 20%, so you will have to hand over 20% of the market value at the time of the sale. In other words, buyers are signing away a share of any future "profit". On the other hand, if prices have fallen when you come to sell, the government and the developer would take a hit, getting back less money than they put in.
"In circumstances where house prices have fallen since the initial purchase, FirstBuy provides an extra cushion for the homeowner against negative equity," claims the Homes and Communities Agency (HCA), the national housing and regeneration agency for England. The maximum property price that will normally be considered is �280,000, though the HCA says that "on an exceptional basis, depending on location," a purchase price of up to �300,000 may be allowed. Studio flats and refurbished properties won't be eligible.
The government had made up to �250m available over the next two years to bring FirstBuy to life, of which up to �210m was earmarked for England, with the remaining cash shared between Scotland, Wales and Northern Ireland. However, the HCA says it is able to bring in a programme to help 10,450 buyers in England by only spending �180m. Some critics say the scheme does little more than scratch the surface of the problems faced by those keen to buy their first home, and that it is more about helping developers to shift their overpriced stock. Others, however, are more positive.
"A scheme that requires only a 5% deposit and offers a 20% equity loan is likely to be extremely popular," says Melanie Bien at mortgage broker Private Finance. "But it is worth remembering that new-build homes tend not to hold their value as well as older homes in a downturn, and if you are borrowing 95% LTV, this is a risky enterprise. Buyers must consider this as a long-term purchase, not a 'get rich quick' opportunity, or they may be sorely disappointed, as well as left out of pocket."
She adds: "It is not yet clear what mortgage products will be available, but a five-year fix will make much more sense than a shorter deal, as it will protect you from interest-rate rises and fluctuations in property values for a longer period of time."
Bien says it remains to be seen how many lenders will sign up. "Many are extremely wary of new-build homes as a result of over-inflated values in the past. Even with a maximum LTV of 75%, some simply won't be interested, deeming it too risky, which will limit choice of product and mean higher rates of interest."
David Hollingworth at fellow broker London & Country says FirstBuy is running along the same lines as the Labour government's HomeBuy Direct scheme, although the equity loan available is slightly smaller. "First-time buyers need to understand the implications of equity loans, and should not simply consider them a cheap way to buy. All options should be considered to make sure it is the right option," he adds.
Source: http://www.guardian.co.uk/money/2011/jun/24/firstbuy-scheme-first-time-buyers
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