Now that the government has expanded shared ownership and equity schemes, is there a glimmer of hope on the horizon for struggling first time-buyers?
If you're a would-be homeowner, the chances are your head's been spinning for the past few months. With the shrinking mortgage market and ‘plunging' property prices rarely out of the news, it's hard to know what to think. While falling house prices could be good news for first-time buyers, they may be of little use if the only affordable mortgage you can get requires a sizeable deposit.
What's more, despite some predictions that the housing market will crash in 2008, prices still prohibitively high for a lot of first-time buyers. Surely property prices would need to drop significantly for home-ownership to be within their reach... Or would they?
The Shared Ownership Option
Until recently, shared ownership was only open to select groups of first-time buyers -- mainly social tenants, those in serious housing need and ‘key workers'. However, last week the government announced that all first-time buyers with a household income of less than £60,000 will now be eligible for its HomeBuy schemes.
HomeBuy allows a buyer to purchase 25% to 75% of a property, then rent the remaining share from a housing association. It's a half-way house between home ownership and renting -- an option for those who want to get on the property ladder, but can't find the funds to do so. Because they're using government money, the rents that housing associations charge must be ‘affordable'. Thus, the combined cost of the mortgage and rent should be manageable for the buyer, who also has the option to buy more shares in their property when they can afford it. The government also plans to spend £200m on brand new housing -- some of which will be sold to first-time buyers through New Build HomeBuy shared ownership agreements.
The Shared Equity Option
Open Market HomeBuy schemes are being extended to first-time buyers on the same basis as shared ownership. These shared equity options allow first-time buyers to take out an equity loan on up to 50% of their property, then get a mortgage on the rest. Thus, on paper, a buyer owns 100% of their property from day one -- even if they do not put down a deposit.
There are advantages to both these options. For a start, shared equity schemes minimise the amount you have to borrow from your bank -- and therefore allow first-time buyers access to the most competitive mortgage deals. In addition, the Ownhome shared equity product (offered under Open Market HomeBuy) offers buyers a 5-year interest free period on their equity loan. Cash grants of £1500 are also available to first-time buyers who take up shared equity schemes. This should help with costs such as legal fees and removals. And while it does mean borrowing more, the advantage of shared equity over shared ownership is that the buyer is able to purchase a property from the open market -- rather than have their choice limited to housing association stock.
n the other hand, plumping for shared ownership means that you're less exposed to fluctuations in house prices, as you haven't borrowed against the full value of your home. Stamp duty is also waived for shared ownership purchases until the buyer is able to afford 80% of the property.
Shared ownership and shared equity schemes do have drawbacks, however. Shared ownership schemes, in particular, have been criticised for their ‘inflexible' rules. Buyers are restricted from extending or altering a shared ownership property without their housing association's permission. Moreover, they're expected to pay 100% of the maintenance costs associated their new home, even though they only own part of it. With either scheme, you would probably be expected to take out the maximum mortgage possible, in order to minimise the amount of government money needed -- so while buyers can expect help, they shouldn't expect too much!
Also, shared equity schemes usually put an upper limit on how much any property you buy can be worth, which could present a problem. Don't forget that if you buy your home through a shared equity scheme, the amount you pay back on your equity loan will not be a fixed sum. Instead, you will pay back whatever percentage of the value you originally borrowed at the current market price. This applies both when you begin making repayments on your equity loan, and if you decide to sell your property.
Likewise, your housing association will be entitled to their fair share of the money you make when you sell your shared ownership home.
Is A Shared Scheme Right For Me?
All in all, both shared ownership and shared equity have their limitations -- so opting for either is not a straightforward decision. If you're able to wait to buy and give yourself time to save up that elusive 10% deposit, I'd still say this could be the better choice. However, shared ownership and shared equity schemes do seem to offer a helping hand for first time buyers who want to get on the ladder now -- especially those for whom going it alone seems a near-impossible task.
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