The launch of the Open Market HomeBuy scheme has been welcomed by the mortgage industry.
Designed to help aspiring first-time buyers (FTBs) step onto the property ladder, the design of the plan focuses on both government and mortgage lender aid and is primarily focused on the key workers, social tenants, those on council waiting lists and other priority FTBs.
Launched on 2 October, the scheme is the latest development aimed at improving the position of FTBs, who have over the past few years found it an increasing struggle to get onto the property ladder.
Since HomeBuy was initiated in 1999, 40,000 people have been helped to buy part of their own property. With the launch of the Open Market HomeBuy scheme, the government has set a target of a further 100,000 FTBs within four years.
Market conditions.
As a result of rising house prices and utility bill costs, as well as increases in the general costs of living, more and more people are struggling to get onto the property ladder. Research by Hometrack revealed house prices had grown by over 4 per cent across the UK over the past 12 months, with a growing interest in the buy-to-let (BTL) market. Keen investors are snatching up potential FTB properties, resulting in the number of FTBs in the market stagnating. Instead much of the market revolves around those moving or remortgaging, with the BTL market reporting considerable growth. Estimations suggest up to half of all properties could be second home or BTL investment properties, which casts further doubts as to the future of the FTB market.
In an effort to improve the situation, the government has pledged to increase the number of homeowners in the UK to 75 per cent, but new schemes have to be launched in order to achieve this. Currently more people than ever are renting, either as a lifestyle choice, or due to financial constraints that hinder their ability to buy a property.
It is hoped the HomeBuy Scheme will aid the problem, although Yvette Cooper, Minister for Housing, admitted it was a short-term solution. She said: “We want to help more families get a first step on to the housing ladder. If you haven’t got family or friends who can help, it can be hard to get started. In the long run we need to build more homes to ease the pressure on house prices. But in the meantime this new mortgage deal will help thousands of families into a home of their own.”
Supported by Nationwide and Yorkshire Building Societies, Advantage Home Loans and Bank of Scotland (BoS), the lenders will put in a percentage of the loan, with the government matching the lender’s percentage share. Each lender will provide equity loans of 12.5 per cent to help bridge the gap in affordability, with the government also providing an interest free equity loan of 12.5 per cent.
As a result, FTBs will be able to obtain a loan based on 75 per cent of the property price, with the repayments on the two separate equity loans not having to be repaid during the first five years. Borrowers can therefore borrow a larger amount, with indications suggesting a family on a combined salary of £35,000 could buy a property worth £160,000, as opposed to the £122,500 available to through a typical mortgage.
Andy Caton, corporate development director at Yorkshire Building Society, said the launch of the Open Market HomeBuy scheme would help aspiring FTBs get on the market, in a sensible way. He said: “While the trial of the new Open Market HomeBuy scheme is not designed to provide a solution to all the problems that FTBs have in today’s market, it will give help to some of those who need it most.”
The eligibility of Open Market HomeBuy scheme applicants will be decided by HomeBuy agents, who are employed by local housing associations. The agents will be responsible for explaining the scheme, as well as the applicants’ eligibility.
Product design
For the Advantage Open Market HomeBuy proposal, Advantage will lend on a two-year stepped fixed rate, available at an initial rate of 5.59 per cent. After the two-year rate the rate reverts to LIBOR plus 2.50 per cent, of between 12.6 to 77.5 per cent of the property price. As part of the Advantage Residential Ownership Loan (ROL), an interest free loan of 0 per cent for five years is offered, before reverting to 2.89 per cent for the remainder of the term. The Advantage ROL is fixed at 12.5 per cent of the property price.
The Nationwide product is available at an initial rate of 5.75 per cent, tracking at 1 per cent above Bank of England Base Rate (BBR).
For the Yorkshire product, the 75 per conventional loan is a tracker mortgage set at BBR plus 1 per cent for the first five-years, before reverting to BBR plus 1.25 per cent for the remaining term of the loan, available on a capital and interest basis. The 12.5 per cent equity loan provided by the Yorkshire is charge-free for the first five years, then 3 per cent fixed interest will be charged for the remaining term. The equity loan is interest only. The 12.5 per cent loan provided by the government is charge-free for the full term of the mortgage.
However, as with all the schemes, when the property is sold, the government and the lender will rake in a share of any increase in property value, but will also have to address any financial cover if the property falls in value.
Commenting on the launch of the initiative, Stuart Bernau, executive director at Nationwide, said: “When it comes to buying a property in today’s market, key workers and FTBs need all the help they can get. We are already a player in low-cost home ownership, with a long-standing involvement in funding housing associations, who, in turn, help many people to buy properties on a shared ownership basis. The scheme is a natural step for us and we are pleased we can help even more people get onto the housing ladder.”
A broker, who wished to remain anonymous, said: “The scheme could work in certain parts of the country where house prices are relatively cheap, but even with the assistance I don’t see how aspiring FTBs will be able to afford property in the more central areas, such as London.”
More to be done
Over the past few years much has been made of the plight of FTBs. The Open Market HomeBuy scheme should help a number of those looking to buy their first property and lenders should be encouraged and congratulated for providing additional avenues through which borrowers can achieve their dream. However much still needs to be done to improve consumer knowledge as to the choices available to them, while lenders and the government must continue to innovate to help more people onto the property ladder.
