The problems facing first-time buyers have been high profile in the press for many months now and the Government has been eager to let people know it is taking the issue very seriously. In April this year the Office of the Deputy Prime Minister published a Consultation Paper called HomeBuy – Expanding the Opportunity to Own.
The document outlines the Government’s ideas for helping borrowers to get a foot on the first rung of the housing ladder, especially those with low incomes and key workers. It is recognised that certain groups of potential homeowners will require a helping hand and at the heart of the Government’s proposal is a scheme, which will integrate the use of public and private finance. The consultation period ended in June and the Government will be publishing the results of the feedback it has received by mid-September.
Three products
The Government is suggesting the creation of three products:
Social HomeBuy – This will help existing social housing tenants acquire a minimum of 50% of their home’s discounted value with a housing association, or their local authority, owning the remaining equity.
New Build HomeBuy – Under this scheme, buyers will acquire a 50% share in a new property with the remaining equity being owned by a housing association. This scheme will be aimed at key workers, existing social tenants, people on the housing register and first-time buyers who are deemed to be a priority for help via regional Housing Boards.
Open Market HomeBuy – This scheme targets the same people as New Build, but with properties being purchased from the open market with at least a 75% share being acquired by the occupant. The Government is currently unsure whether it should charge borrowers up to 3% per year for the amount which it proposes to fund, either from the outset or after a specific period, such as five years. In the Consultation Paper the Government hints that it would prefer to keep costs to a minimum with no charges being made on the equity stake provided by the Government for the first five years and the borrower then paying only 3% from year six onwards. The Government sees this approach as one where the buyer has a period of time in which they can get used to the demands of homeownership and ensure their finances are in good order for the future.
The alternative is for a charge of 3% to be imposed on the whole Government equity stake from the outset. Clearly, this will make the scheme less attractive, but will require less public subsidy per scheme, thus making it available to more people. The Government share of the equity loan, however it is charged for, will be provided via specialist housing associations which are appointed as Zone Agents (in the same way as the current key worker scheme).
The proposed scheme with lenders is a development of the existing HomeBuy scheme. It would combine a standard mortgage for 75% of the value of the property, with an equity loan for the remaining 25% being split between the Government and lenders. This scheme will be initially piloted via the Open Market HomeBuy scheme referred to above, and, if it is successful, it will be extended to the other HomeBuy schemes.
If everything goes according to plan, the Chancellor’s idea is to eventually extend the scheme to involve a mix of 50% public- private equity with 50% funded by a standard mortgage. However, this will not be considered until the Government has some experience of running the 75%:25% model.
The scheme has to make commercial sense for lenders and the industry is watching the development of the Government’s proposals with keen interest.
Lenders’ issues
One of the issues which will inevitably be uppermost in the minds of lenders is what happens if the housing market does take a nose dive? The good news is that the consultation paper suggests that any losses arising from a fall in property value would fall primarily on the shoulders of the Government. When a property is sold, the outstanding standard mortgage will be repaid and the equity loans would also be repaid in line with their original proportions. If the property was sold for less than its original price, the mortgage will be repaid first, followed by the lenders’ equity loan and the Government’s stake will be last in line, thus greatly reducing the risk to lenders.
The Council of Mortgage Lenders (CML) is broadly in favour of equity loans, as its own research demonstrates that demand is greater than supply for these types of schemes. The CML likes the types of schemes being proposed, as they do not increase expenditure, but rather stretch it to help more people. However, shared equity schemes do not provide a complete answer to the first-time buyer housing conundrum. Such schemes have to be developed in tandem with a greater supply of new housing.
Whether lenders have the same enthusiasm for the proposals as the CML remains to be seen.
