FirstBuy – Does it help “PropVestors” or just another government gimmick?

  • First Time Buyers

    Help for 10,000 FTBs

  • Shared equity means, shared losses
  • Help only for a few FTB and only New Builds

What is it?

1. FirstBuy will be offered on selected properties across a range of new build schemes following an assessment of offers submitted by developers.

2. Eligible purchasers who need assistance to buy will be offered an equity loan of up to 20% of the purchase price. The equity loan will be funded equally by the HCA and the developer. Potential bidders should note that it is an absolute requirement of the programme that developers must provide matchfunding equity.

3. The maximum property price expected for FirstBuy is £280,000, based on the affordability assessment for purchasers.  On an exceptional basis, depending on location, a purchase price of up to £300,000 will be considered.  We expect that most bids will be for lower priced properties which will be favoured, taking account of location.

4. Purchasers will be required to raise funding, (a mortgage plus any deposit where available) of at least 80% of the purchase price. The buyer’s mortgage loan is secured as a first charge on the property in the usual way and ranks ahead of the equity loan charge.

5. Both the developer and the HCA will take an equal second charge over the property to secure their interest. The equity loans are secured as second charges on the property and are on an equal footing between the HCA and developers.

6. The form of equity mortgage will be prescribed by the HCA (and will follow the form of equity mortgage used for HomeBuy Direct, which is familiar to lenders and solicitors, and to the market).  Both the developer and the HCA will lend on the same terms.  The use of a standardised charge will simplify the conveyancing process, make the product more attractive to lenders and help with marketing the product to individuals. Each equity loan term is 25 years but repayment is required on sale of the property.

Future?

If a buyer opts to sell the property prior to the redemption date (of 25 years), or redeems their main mortgage prior to that period (without immediately refinancing) the equity loan based on the relevant percentage share of the market value at the time becomes repayable in full.  Owners may redeem the equity loans (staircase out) in future in full or in part, earlier, if they wish. Both equity loans must be redeemed or partially redeemed simultaneously and in equal proportions. The minimum amount for each equity loan redemption will be 10%.

OriginalPurchase price:  £200,000
Mortgage:   £150,000 (75%)
Deposit:    £10,000 (5%)
Equity loan:  £40,000 (20%) (developer £20,000 (10%) + HCA £20,000 (10%))

For the first five years the equity loan is charge free.At the start of year 6 a low equity charge is levied of 1.75% rising at RPI +1% per year thereafter.

PRICE RISES
OMV:    £210,000 (a 5% uplift in value).
Mortgage repayment:  £150,000.
Equity loan:  20% of OMV split equally between the HCA + the Developer = £42,000 (£21,000 each).
Remainder available to the purchaser to use as a deposit £18,000 for their next purchase.

PRICE FALLS
OMV:     £180,000 (a 10% fall in value).
Mortgage repayment:  £150,000.
Equity loan:   20% of OMV split equally between the HCA +the Developer = £30,000 (£15,000 each).
The HCA and developer each absorb a £5,000 loss. The purchaser receives no capital and loses their deposit. Applicant eligibility criteria

Eligibility will be the same as for our other HomeBuy schemes (i.e.households earning less than £60,000 who could not otherwise afford to purchase a suitable property on the open market unassisted).  FirstBuy is targeted at providing support for the first time buyer market and for those returning to the market as a result of relationship breakdown.   Bidders will wish to note that eligibility criteria may change during the life of the scheme and that, in particular, the draft London Plan proposes a higher threshold for eligibility in London of £74,000 for families buying a home with three or more bedrooms.

Who wins from FirstBuy?
Certainly, the government. In fact, it’s a double win from a politician’s perspective.

  • Firstly, Osborne is being seen to support struggling first-time buyers, which goes down well with voters.
  • Secondly, FirstBuy also helps prop up the struggling housing market, which the authorities have decided – rightly or wrongly – that they can’t afford to let find its own level.
  • Finally, anyone looking to sell a house or move up the ladder needs a healthy market with decent turnover (including a bottom level influx of first-time buyers or buy-to-let landlords). Existing homeowners may benefit if FirstBuy keeps the overall market moving, though the programme itself only applies to new build homes and that a very small percentage of the market.

Point of View of the Developers
Developers appear to be back-tracking fast on the new FirstBuy scheme, which they put together with the Government.
The Home Builders Federation conceded: “In an ideal world, you wouldn’t offer shared equity. But we are not in an ideal world.”This morning’s Halifax survey shows that in this less than ideal world, house prices remain stubbornly unaffordable at nearly seven times average FTB earnings, with signs of only a very slow downward shift.However, developers are now worried that their share of the £250m that the industry will collectively pump into the scheme will appear on their balance sheets as a loss, whilst showing little return.

Point of View of the First Time Buyers
It seems like a welcome thought from the developers, but it can be taken with a pinch of salt considering the strict criteria, and the new build factor. This restricts to only certain locations and lenders are already very anxious with new builds, and current market conditions suggest that 65-70% is the max available to new build flats.
The fact that if values fall the FTB is only going to lose the deposit and that the developer also shares the liability also will encourage risk averse FTBs.

Other Help –Lenders?
First-time buyers are to be encouraged to save up for a deposit through a new scheme launched yesterday.

Clydesdale and Yorkshire Banks are launching a new savings account, Regular Home Saver, which provides a monthly saving facility, with the flexibility to vary payments during the term.

While savers will not be attracted by the interest rate of just 0.5% (0.4% after tax) or the 40-day withdrawal period, the chief incentive is a cashback of up to £1,000 if borrowers take out a Clydesdale or Yorkshire Bank FTB mortgage. The 40-day notice period will be waived if one of the bank’s FTB loans is taken out.

The bank offers FTB loans at up to 95%.

The average UK FTB property costs £121,717, so a 5% deposit would be £6,085. Saving £200 a month for two and a half years would achieve this target.

The account requires a minimum monthly deposit of £200, and the minimum required to open and maintain the account is £200. Payments can be increased or decreased provided the minimum monthly deposit is maintained.

Interest rate will pay and track Bank of England Base Rate (currently just 0.5%).

Customers saving a deposit of at least 5% and taking a Clydesdale or Yorkshire Bank FTB mortgage will be eligible for £500 cashback, while those saving a deposit of at least 10% and taking a Clydesdale or Yorkshire Bank FTB mortgage will be eligible for £1,000 cashback

Overall Impact on Market

PropVestment believes that the overall impact of the market will be fairly low and that this scheme is more a gimmick by the government to make out like they are helping young first time buyers. In reality the  with such a small number of properties and tight criteria it will hardly effect the market as a whole. Especially the new build only factor, how many inner city has major new developments at the moment. Therefore the overall impact for general PropVestor and the market as a whole will be almost non existent.

Further help comes from the BOE holding interest rates at 0.5% for another month. This allowing PropVestors to have lower mortgage payments and surplus cash flow from rental net of mortgage repayments can be reinvested, in particular to help the still large deposits required by lenders.

Sources: The Times, The Telegraph, HCA website
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