Hope at last for first-time buyers
Haven't got enough saved up to buy your first home? No problem, the Government will help you out - as long as your income is low enough...
The Government rightly gets a kicking for a lot of its harebrained housing schemes, but now and again, whether through luck or judgement, it happens across a decent idea. And its range of shared equity HomeBuy schemes might just be the answer for many struggling first-time buyers.
What is HomeBuy Direct?
The Government has developed a range of five separate HomeBuy initiatives, aimed at helping first-time buyers into home ownership:
New Build HomeBuy
The borrower shares ownership of the property with a housing association, paying a mortgage on the portion they own, and rent on the rest.
Open Market HomeBuy
The borrower takes out a conventional mortgage to fund part of the purchase, with a low-interest equity loan covering the rest.
Social HomeBuy
A housing association and local authority tenant buy the home on a shared ownership basis or outright, with a discount on the share being purchased.
Rent to HomeBuy
The tenant pays reduced rent on a new-build home for up to five years, to help them save for a deposit and purchase the property
HomeBuy Direct
The last scheme is HomeBuy Direct. Under the scheme, the borrower takes a 70% stake in a new-build property, with the Government - via its Homes and Communities Agency - and the developer together providing an equity loan of 15% each for the rest of the property. When the property is sold on, these parties will then be due 15% each of the proceeds of the sale.
The equity loans are only repayable after 25 years, and are interest-free for the first five years. After that, you will pay a fee of 1.75% on them, rising annually by the retail price index plus 1%. However, you can reduce the impact of this by making part repayments on the equity loans after the first twelve months of the deal.
It has already proved the most popular of the schemes, with the Government devoting an extra £80m to HomeBuy Direct in the Budget, on top of the £400m it had already committed to the initiative.
Who qualifies for HomeBuy Direct?
One of the Government's biggest failings with this scheme has been how poorly it has been marketed. Most people, perhaps understandably, expect it to only be open to key workers. However, HomeBuy Direct is actually available to anyone who cannot afford to buy a home on the open market, whose total household income is less than £60,000.
You will be expected to demonstrate the ability to sustain home ownership, as well as demonstrate a good credit record, and have the money available to pay the usual costs of moving, such as Stamp Duty and any legal fees.
Which lenders can help?
Irritatingly, just a handful of lenders have so far committed to offering mortgages in conjunction with the scheme, a situation made all the more bizarre when you consider the Government stakes in many of our banks.
Halifax and Royal Bank of Scotland led the way, before Nationwide jumped onboard at the end of last month. Woolwich and HSBC have also said they intend to begin offering products on the initiative.
Buyers should be aware that the Nationwide proposition is slightly different - while the other lenders involved with the scheme are generally prepared to lend the full 70% required, a 5% deposit is required with Nationwide.
What's the catch?
Perhaps inevitably, the process of getting on board with HomeBuy Direct is, to put it politely, a bit of a mess. For a start, the scheme is only available in England. The Government has divided England into 15 regions, each serviced by its own HomeBuy Agent, and these should be your first port of call.
Once you have registered with your local agent, you are required to see an approved independent financial adviser to ascertain your exact financial circumstances. The HomeBuy Agent will then assess whether you are eligible for the scheme. When they give you their approval, they will also include details of the applicable HomeBuy Direct schemes in your area.
After that, it's down to you to find a property you like and proceed with a mortgage. One important thing to bear in mind - the developers and HomeBuy Agents will likely push you towards one of the brokers on their panel to arrange the mortgage, and may pressure you into using them. You are under absolutely no obligation to do so, and can use whoever you like to help arrange the mortgage - and they are not allowed to charge a fee for the advice - though it does have to be done through a broker.
The scheme is also only available on certain sites. So far the Government has approved more than 18,000 properties for inclusion in the scheme, details of which can be found on the Homes and Communities Agency website.
The final catch is the fee for the products themselves. Buyers are not allowed to add the fee to the mortgage, which is plain daft in my view, as it is a further cost the buyer needs to cover upfront. While adding the fee to the mortgage does increase the overall cost of teh mortgage in the long run, and should not be done lightly, I think borrowers should at least be given the choice to decide for themselves.
Overall, the HomeBuy Direct scheme is far from perfect, and any first-time buyer considering the scheme should ensure they go into such a transaction with their eyes wide open. But struggling first-time buyers would do well to seriously consider it, as it does present a real opportunity for you to take that first step onto the housing ladder - without needing to put down a massive wad of cash upfront.
More: Repossessions up 51% - but borrowers are fighting back | Don't dismiss fee-free deals
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Been lurking for ages here - but wanted to chip in on this topic!! The GOOD thing about this particular scheme for FTBs is that you are free to buy anywhere in England, unlike Key Workers who have buy buy within a radius of their job. I enrolled for Open Market Homebuy, but despite jumping though all sorts of hoops, travelling to Dartford to speak to their financial 'adviser' etc., the funds for FTB had run out within weeks of the funding becoming available thus putting a halt on my plans. The way I was told it works is that various pockets of the total fund is allocated for each key worker group (some for firefighters, some for teachers, some for nurses etc) as well as "some" for First Time Buyers. In my area the money allocated to FTBs was used up almost immediately. It really is a lottery, and you could miss out on the loan if someone else in the scheme exchanges contracts a day before you do and the fund is empty. As others have mentioned above, unless you DO have a deposit to put in of your own, you are effectively borrowing 100%. And the equity loan interest is payable monthly immediately (it is only deferred for 5 years under one of the schemes). However, you should still be protected from negative equity situation because the value of the equity loan is always relative to the value of the property at any point in time (at least this is how my brain worked it out!). You will discover, if you join this scheme, that you MUST have a repayment mortgage on the mortage portion (at least, this is what my 'advisor' told me) which makes this effective 'shared ownership' scheme more expensive than some people initially assume using interest only mortgage values. Likewise, I believe you have to pay the mortgage arrangement fee upfront (it can not be rolled into either mortgage or equity loan) so you need to ensure you have funds to cover this as well as other fees, stamp duty etc. A caution about buying back more equity: this may be advantageous because whenever you are ready to buy back a portion, the property is revalued, the value of the equity loan is adjusted relative to this new price (e.g. it can go up as well as down). So if you bought this year under the scheme, and house prices continued to drop, so would the relative value of your equity loan - so you could take advantage of that situation by buying back an effectively larger proportion of the equity it if you were in a position to do so (who would be though?!). However, there are costs involved every time you pay back a portion (e.g. proper valuation, admin charges etc). You may be better overpaying your mortgage if that costs you nothing, rather than trying to buy back the equity in smallish annual installments as some people possibly think of doing.
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"HomeBuy Direct is actually available to anyone who cannot afford to buy a home on the open market, whose total household income is [b]less than £60,000[/b]" That identifies the problem perfectly - if 2 people on above average salaries cannot buy a house between them then the sellers are asking too high a price. The government should get out of the way and let the market fix the problem. Only available on new-builds? Is that because the MPs have shares in Barrats as well as their buy-to-let empires?
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This is not a good article. It says nothing new and also makes no reference to the fact that most of the funds have run out only a few weeks after funding started. [b]What would be really useful[/b] is an article which gives advice as to what to do if your application has been turned down due to lack of funds. As has happened in my case. What are the alternatives? How do you raise the money to buy your first home? That would be far more useful.
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20 May 2009