Achieving the dream of home ownership continues to elude many would-be first time buyers mainly as a result of the continuing rise in UK house prices. While many depend on family and friends to secure a first foothold on the property ladder, and some stretch themselves to the limit in terms of their mortgage, others are not able to rely on these options.
The Department for Communities and Local Government (DCLG), which replaced the Office of the Deputy Prime Minister last year, set itself a target of helping 100,000 people to buy their own properties by 2010 – in fact, Gordon Brown recently announced that 160,000 families would be able to become homeowners for the first time through shared equity in the next four years. As a means of achieving its target, the Government introduced the new HomeBuy scheme. The main premise of the scheme is to enable social tenants, key workers and other first time buyers to buy a share of a property and secure that all-important first step on the ladder.
There are three HomeBuy products available - Open Market HomeBuy, Social HomeBuy and New Build HomeBuy. All three are based on equity sharing and offer people a choice in the type of home they can buy. The most recently introduced of these schemes is the Open Market HomeBuy, launched in October 2006.
Open Market HomeBuy
To qualify for the Open Market HomeBuy product, the buyer needs to raise finance to purchase around 75 per cent of a property on the open market. This scheme sees the Government and selected lenders each funding up to 12.5 per cent of the cost of the property. Interest payments to lenders start after five years while the loan provided by the Government is interest free indefinitely. When the buyer sells their home or ceases to be a key worker, the same percentage of the value of the home will be paid back.
Some of the selected banks and building societies currently involved in the scheme include Nationwide, Yorkshire Building Society, Advantage and Bank of Scotland. With the lenders matching the available funding, the Government’s resources therefore stretch twice as far as they would if no lenders were on board.
Although this scheme has been devised with key workers in mind, particularly those working in the East, South East and London, it is also available to other first time buyers and those in council houses, housing associations or on waiting lists for this type of accommodation. Applicants are assessed by HomeBuy agents employed by local housing associations. The agents, each assigned a specific region, assess eligibility, help buyers find a suitable home within their local area and handle the entire application process.
The other schemes available in the HomeBuy scheme are:
Social HomeBuy
Housing association and local authority tenants who do not have the right to buy, right to acquire or cannot afford either scheme, can buy a minimum initial share of 25 per cent in their rented home with a pro-rata discount of up to £16,000. The remainder of the equity is then retained by the landlord who can levy a charge of no more than 3 per cent of the capital value of their retained equity onto the tenant. Tenants are allowed to buy 100 per cent equity at a discount if they can afford to do so.
The New Build HomeBuy
The New Build HomeBuy works in the same way as the Social HomeBuy (minimum equity share of 25 per cent and a levy charged on the landlord’s retained equity) but involves only new build property. The buyer has the opportunity to buy further shares in their home at market value if they can afford to do so later – a process known as ‘staircasing’.
Whereas Social HomeBuy tenants would initially approach their social landlord for details of the scheme, HomeBuy agents would be the first port of call for those interested in the New Build HomeBuy and the Open Market products.
In December 2006, English Partnerships, the national regeneration agency, announced details of the first schemes forming part of The First Time Buyer Initiative, which will help would-be homeowners in London, Manchester and Portsmouth. This scheme, just one form of the New Build HomeBuy, uses public sector land to provide affordable housing. With a target of delivering 15,000 affordable homes across England by 2010, around 50 per cent of these homes will be made available to key workers. The remainder will be available to groups identified as priorities by Regional Housing Boards. Further schemes are to be announced in the near future, including sites that will be part of the Government’s affordable housing competition, where homes will be built and sold for under £60,000.
Assessing the impact
As some of these schemes have been introduced relatively recently and are still bedding in, their full impact has yet to be assessed. The Government says that products on offer such as the Open Market and New Build HomeBuy schemes build on the previous shared ownership and Homebuy equity loan products that were introduced at the end of the 1990s. Since the HomeBuy scheme was first introduced in 1999, a total of 40,000 people have received assistance to buy part of their own property. Only 11,000 people were helped by the HomeBuy schemes in 2004/2005 despite the fact that 60,000 applied.
With this in mind, the Government’s target of creating 160,000 more homeowners in the next four years seems very ambitious.
Where disseminating information about the HomeBuy schemes is concerned, it is unclear whether the intended recipients of help are even aware of what is on offer: research carried out recently by Teachers Building Society found that 90 per cent of education professionals said they were not well informed of the HomeBuy schemes.
An evolving issue
The Government will certainly need to work hard to ensure that the HomeBuy schemes are successful. With this in mind, it will be interesting to see how the schemes evolve from here on in. The Open Market HomeBuy in particular is not set in stone, with indications that changes are imminent. In his pre-budget report, Gordon Brown quoted the Shared Equity Task Force report which states that the Government will launch a competition this spring for lenders to join a 2008/11 HomeBuy ‘round’ to reduce its equity share.
The idea behind the competition is to bring in new lenders to see whether they can offer better value. However, reaction to this plan has been mixed from the lenders already involved in the scheme, with some expressing concern at the Government’s plans to extend the Open Market HomeBuy scheme through increased private sector participation. Others do not see any reason why private sector investors should not be prepared to take the risks alongside the rewards of property investment.
Keeping the objective in
sight
From the aspiring homeowner’s point of view, of course, it is important that, whatever the inner workings of such schemes, they should be of benefit to the new homeowners who would not otherwise have had the opportunity to realise their aspirations.
Brokers certainly have a role to play in ensuring that the relevant clients are aware that such assistance exists, but should discuss the potential pitfalls as well as the benefits of the schemes. The complexity of the new HomeBuy schemes has always been a cause for concern, particularly as eligibility criteria differs significantly from one scheme to another. Brokers can help their clients by advising them to undertake thorough research before embarking on any of the schemes.
It’s also important to make clients aware that the maximum possible share available via a scheme may not necessarily be 100%. Buyers should also ask about the potential implications of selling on the property – by way of example, in the case of the Open Market HomeBuy scheme, if the value of the property increases substantially, the buyer must be aware that it is the percentage of the current value of the property that is paid back and not the amount of the initial loan.
Key workers need to be particularly alert to the restrictions that affect them should they cease to be employed in their public sector role. Key worker buyers of New Build HomeBuy or shared ownership have five years in which to sell their share in the property or to ‘staircase’ to full ownership. Where Open Market HomeBuy is concerned, key workers would have to pay their loan back within two years if they left their job, even if they did not plan to sell the property.
The Government seems keen to impress on us that it is committed to helping create new homeowners but there is a definite sense that the measures introduced are only scratching the surface. The success of the new HomeBuy scheme has yet to be seen but it is clear that more needs to be done if the impact of its efforts is to be truly felt by the hundreds of thousands whose dream is to live in a home of their own.
