Property News - How to get help with a property deposit
The Government's latest initiative to
help first-time buyers on to the property ladder will give hope to
many who are struggling to buy. But experts are warning that many will
be disappointed.
The Open Market Homebuy scheme, announced this month, allows those
eligible to buy from a private seller, r ather than from a housing
association or other low-cost housing scheme.
A government subsidy reduces the initial costs of the mortgage, and
the private-sector lenders involved waive interest on part of the
purchase cost. The terms of the scheme are restrictive, however, and
the Government says only a small number of buyers - around 20,000 -
will qualify.
How does Open Market Homebuy work?
A homebuyer chooses their property in the usual way, but they only
need to arrange, and be able to afford, a mortgage for 75 per cent of
the purchase price. The difference is made up of two further "equity"
loans: one of 12.5 per cent of the price from the Government, and
another 12.5 per cent loan from the private sector. These loans are
interest-free for the first five years.
After five years, the government loan remains free, but the private
lender can charge interest. This is capped at 3 per cent until year 10
of the mortgage. But buyers using the scheme have to give up a quarter
of the sale proceeds from their home when they move on, including any
rise in value. The money will be used to repay the equity loans.
Who is eligible?
In theory, anyone who is a first-time buyer can apply. Cases are
decided on by housing associations, which issue eligibility
certificates. In practice, the priority will be for key workers such
as teachers and nurses, as well as social housing tenants.
Buyers have to qualify for a mortgage as well as meet the scheme's
rules. One advantage of Open Market Homebuy is that buyers are only
assessed on the basis of the 75 per cent of the property's cost that
is covered by the normal mortgage, as there are no interest or capital
payments for five years on the remaining 25 per cent. There is no need
for a deposit, and unlike 100 per cent mortgages on offer in the
mainstream market, there are no higher lending charges. According to
Ray Boulger, senior technical manager at mortgage broker John Charcol,
this makes the scheme good value, when set against other, 100 per cent
loans.
I think I might qualify: what are the drawbacks?
The complexity of Open Market Homebuy might put off some buyers.
Others might find the choice of lenders limited. There are four: the
Yorkshire and Nationwide building societies, HBOS and Advantage, which
is part of Morgan Stanley. Buyers have to take their main mortgage
with the same company that provides their equity loan.
Only Advantage offers a fixed-rate deal, 5.59 per cent in the first
year, 6.59 in the second and variable after that. All deals have a
five-year lock in, with redemption penalties for selling the property
or remortgaging before then. For buyers who do not need a 100 per cent
mortgage, standard home loans will be more flexible and possibly,
cheaper.
What happens if property prices rise - or fall?
If house prices rise, then the equity lenders will want their share of
that rise. Over five years this could be a substantial sum. If someone
bought a property for £100,000 and it doubled in value, they would
have to pay a quarter of the sale price to the lenders. That includes
the £25,000 they borrowed interest free, and a 25 per cent share of
any increase. By comparison, it would cost only £6,250 to borrow
£25,000 for five years at an interest-only rate of 5 per cent. There
are always alternative means of buying a property: saving just a 5 per
cent deposit could enable a buyer to apply for a normal mortgage over
three times salary.
And house prices fall, scheme lenders will still need to be repaid.
The Government will bear its share of any loss, asking for 12.5 per
cent of the sale price. Of commercial lenders, only Advantage is
prepared to take a reduced capital sum if house prices fall.
The Government's latest initiative to help first-time buyers on to the
property ladder will give hope to many who are struggling to buy. But
experts are warning that many will be disappointed.
The Open Market Homebuy scheme, announced this month, allows those
eligible to buy from a private seller, rather than from a housing
association or other low-cost housing scheme.
A government subsidy reduces the initial costs of the mortgage, and
the private-sector lenders involved waive interest on part of the
purchase cost. The terms of the scheme are restrictive, however, and
the Government says only a small number of buyers - around 20,000 -
will qualify.
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