Experts are warning that many will be disappointed with the UK Government's initiative to help first-time buyers on to the property ladder. The Open Market Homebuy Scheme allows those who qualify to buy from private sellers, as opposed to a housing association or other low-cost housing organisation.
The scheme works by the Government providing a subsidy to reduce the initial costs of the mortgage and then the private sector mortgage lenders involved waive interest on part of the purchase price. However, the terms of the scheme are restrictive and the Government expects only a small number of buyers - around 20,000 per year - to qualify.
It works like this: A homebuyer selects a house in the usual way, but they only need a mortgage for 75 per cent of the purchase price. Of course they still need to demonstrate that they can afford the mortgage repayments. The 25 per cent difference is financed by two additional "equity" loans: one of 12.5 per cent of the purchase price from the private sector and another 12.5 per cent from the Government. Both these extra loans will be interest-free for the initial five years.
After five years, the private lender can charge interest but the Government loan remains interest free. Interest on the private lenders loan is capped at 3 per cent until year 10 of the mortgage. But homeowners on the scheme have to pay 25 per cent of the sale proceeds from their home to the lenders when they move. This includes any rise in value of the property.
So who is eligible to take advantage of this scheme? In theory, all first-time buyer can apply. Applications are vetted by housing associations, which issue what are called “eligibility certificates”. The Government has said that priority has to be given to key workers such as nurses and teachers, as well as social housing tenants.
Buyers have to meet the scheme's rules as well as qualify for the mortgage. One advantage of the scheme is that applications are only assessed on the basis of the 75 per cent of the property's price as there are no interest or capital payments for five years on the remainder. The buyers do not have to find a deposit and there are no higher lending charges.
The drawbacks is that the scheme is complicated and may put off some buyers. Not all mortgage lenders take part in the scheme and so the choice of lenders is currently limited to the Nationwide and Yorkshire building societies, HBOS and Advantage, which is part of Morgan Stanley. Buyers have to organise their main 75 per cent mortgage with the same lender that provides their equity loan.
One of the burning questions is what happens if property prices fall further? If house prices fall and you sell the house at a lower price than you paid for it, the Government will bear its share of any loss, asking for 12.5 per cent of the sale price. Of commercial lenders, only Advantage will accept a reduced capital sum if house prices fall.
If house prices rise, and that could be some time off, then the equity lenders will demand their share of that rise. They will claim 12.5 per cent of the sale proceeds net of legal costs.
Michael Challiner is the editor for Brokers Online, one of the UK’s largest finance sites. Visit Brokers Online to find out more about
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