A new scheme called Genie is being rolled out to help first-time buyers get onto the housing ladder - without a mortgage or deposit
House prices may have stuttered through the last few years, but that hasn't made it any easier for potential first-time buyers to get onto the first rung of the ladder.
Most lenders ask for at least a 10% deposit, and on a typical £160,000 property that is still a sizeable £16,000. Those wanting to buy in the pricey south east face an even greater challenge to amass the funds needed to buy.
If you don't have a decent savings pot, and you can't go to the bank of mum and dad for some deposit dosh, you are effectively blocked from the housing market. And this is even more frustrating given the fact that mortgage rates are currently very affordable because rates are so low.
So it comes as no surprise that a pilot scheme designed to help frustrated first-timers to get on the market without a deposit, or even a mortgage, has proved so popular that it is now being rolled out across the country after investors pledged £150 million.
Release the Genie
The scheme, called Genie, is a new type of homeownership plan that does not require the buyer to get a mortgage or a deposit.
The pilot took place in the north east over the last year, where 43 homeowners have moved into a Genie home, and it is now being rolled out across the north west and London, with homes expected to be available from January 2013.
How does the scheme work?
Customers choose a 'Genie' home and instead of a mortgage, begin a 25-year payment plan where they pay a 'residency fee' each month. This is pre-agreed for five years, so you have decent payment security, and the amount is reviewed every five years.
As soon as you start your payment plan you begin to accrue shares in the property and you own the home outright when you have accumulated a 100% share in it. This is usually at the end of the term, unless you have made lump sum overpayments, increased your monthly residency fee, or bought out Genie’s share.
What’s on offer?
I looked at one of the properties currently on offer through Genie, a modest two-bed mid-terraced home in Newbiggin-by-the-Sea in Northumberland. According to the firm it has an open market value of £95,000, although on checking Rightmove the most expensive two-bed house I can find in the same area is £89,950 and the second most expensive is £69,950.
Those properties may not be as desirable as the Genie home, but they offer a useful comparison of what else is out there.
There is a one-off administration fee of £720 payable to Genie as part of the application process. The residency fee on this particular property starts at £510 a month for the first year, after which you have accrued a 3.6% share in the property. The fee then rises annually, as the table below shows:
|
Year |
Monthly fee |
Share acquired by end period |
|
1 |
£510.00 |
3.6% |
|
2 |
£525.30 |
7.2% |
|
3 |
£541.06 |
10.8% |
|
4 |
£557.29 |
14.4% |
|
5 |
£574.01 |
18.0% |
How does this compare to a mortgage?
I couldn't do a like-for-like comparison since mortgages require a deposit and interest rates don't usually increase each year for five years. The nearest I could find is HSBC’s five-year fixed rate at 4.89% up to 90% of the property’s value.
It comes with an arrangement fee of £599, which beats the Genie administration fee of £720. Of course, based on the same asking price of £95,000 the buyer would need to stump up a 10% deposit of £9,500 in order to get this mortgage, compared to needing nothing for the Genie deal.
But assuming you could raise a deposit you would then take out a mortgage of £85,500 and this would mean monthly payments of £494 based on the HSBC deal. Clearly this is significantly cheaper than the Genie deal over the first five years, but of course it is based on a lower borrowing level because of the deposit.
What happens after five years?
After five years Genie and the customer agree the next five-year plan and this is reviewed in the same way at each five-year anniversary. The residency fee is currently rising at 3% a year (called the Increase Rate) and the Genie Interest Rate is 6%.
The Increase Rate is not linked to any public rate, but the business told me it considers the long-term Retail Price Index when setting the rate. So it could move up or down, but there is no way to predict it. The Genie Interest Rate is representative of Genie’s cost of financing the home purchase.
Both rates are reviewed every five years.
What if the new rates seem too high?
You can request a ‘personal flexibility adjustment’ for up to 12 months, where you simply pay rent and do not accumulate any shares. This can be requested twice during the term.
You can also overpay, if you want to accumulate shares more quickly and shorten your term, by either making a lump-sum payment (minimum £5,000) or increasing your Monthly Residency Fee.
Basically, within limits, you get the opportunity to review your payments and your accumulation of shares at each five-year review.
What happens when you want to sell?
You can sell it back to Genie at any time at an open market price, agreed by an independent valuer, or if you prefer you can put it onto the open market. You share in any increase in the property’s value, according to your proportion, and in any loss in value. So it’s possible you will get less back from a sale than you paid into the scheme.
The verdict
Any new product that is designed to help first-time buyers over the deposit barrier is of course very welcome, but the Genie scheme is not large enough to make a real difference.
It does offer useful assistance to those who can’t find a deposit yet can afford to meet monthly repayments that are roughly equivalent to mortgage payments. The business is regulated by the Financial Services Authority and it seems to have thought carefully about offering the customer some flexibility throughout the term.
Despite this, you are not technically the homeowner until you have accumulated 100% and, while there is some payment flexibility, I think it is limited.
The final, and perhaps most obvious thing to point out about the Genie scheme is that it is only available on Genie homes, and there are only 23 on the website - all in the north east. Even when it does roll out, your choice is always going to be extremely restricted.
If you can wait a few years to save a deposit, even just 10%, you will have a wider choice of homes, across the country, and a full choice of mortgage lenders.
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