An overlooked leg up for first time buyers?

In this years budget speech, the Chancellor announced a major revamp to the Open Market HomeBuy scheme, designed to make it more attractive and widen the base of borrowers who are eligible.

However, with the credit crunch, and subsequent difficulties suffered by the UK mortgage market dominating the headlines, this beneficial scheme has been somewhat overlooked in the press, but could be an excellent vehicle to help some borrowers buy their first home.

The scheme was introduced by the Government to help borrowers get a foot on the property ladder. It was initially only available to key workers such as nurses, firefighters and teachers, but has now been widened to include all first time buyers with a household income of £60,000 a year or less.

The scheme operates on a shared equity basis where the borrower owns the property outright, but the equity is shared with an equity loan provider (a combination of the Government and a housing association). The loan can provide as much as 50% of the price of the property, and there is little or no interest payable. The remaining 50% is made up from a conventional mortgage, and any deposit the borrower may have.

This makes the monthly repayments more affordable, but more importantly, with price rises having put ownership beyond the reach of many, borrowers can buy a property at up to twice the value they could afford through conventional means.

In return for this low cost equity loan, the provider receives the same percentage of the property value when it is sold, as they lent initially.

E.g. the original purchase price is £200,000 and an equity loan of 50% (£100,000) is granted. The property is sold at a later date for £240,000, so the equity loan provider receives 50% of the sale price (£120,000).

There are two specific schemes;

MyChoiceHomeBuy

This option is offered by eight housing associations collectively known as CHASE.  They can provide an equity loan of between 15%-50% of the purchase price, which can be used in conjunction with a mortgage from most lenders, and any deposit from the buyer.

Interest is payable on the equity loan at an initial 1.75%, and this will increase at a rate equal to RPI + 1%, each year. You can repay the loan at any point after the first 12 months, but being a shared equity scheme, you could repay a different amount to what was borrowed.

Ownhome

This variation is offered through a partnership between the housing association Places for People, and the Co-operative Bank. Places for People provide an equity loan of between 20%-40%, and the mortgage must come from Co-op, on a repayment basis over a maximum 25 yr term.

The equity loan is interest free for the first 5 years, 1.75% for the next 5, and 3.75% thereafter (under the Ownhome scheme, this is called a fee rather than interest).

The application process is fairly simple and the first stage is to contact the local HomeBuy Agent (http://www.housingcorp.gov.uk/server/show/nav.2128 ), who processes the equity loan application. Once this has been approved, borrowers should look to agree a mortgage in principle, being sure to advise the lender that they are applying under the HomeBuy scheme. Once both of these things are in place, the borrower is free to find a property, have an offer agreed and start the home buying process.

Useful websites:

www.housingcorp.gov.uk

www.communities.gov.uk

www.homebuy.co.uk

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