A glimmer of hope emerges tomorrow for thousands of first-time buyers struggling to get on the property ladder.
The Government's Open Market HomeBuy scheme goes live, designed to reduce the initial purchase costs for lower-income workers.
It works on a "shared equity" basis where the customer need only qualify for a mortgage worth 75 per cent of the property's value. The other 25 per cent - the "equity loan" - is stumped up by the state and a participating lender. This quarter share remains the joint property of government and lender and, when the home is sold on, both reclaim their respective percentages - making a profit if prices have risen.
With a £200,000 property, say, the equity loan share is £50,000 - £25,000 each from the lender and government. Sell the home later for £300,000 and the profit would be divided into £75,000 for the borrower and £12,500 each for the other parties.
If house prices have declined, the first hit is taken by the state's 12.5 per cent share. So if the fall is 12.5 per cent or less, says Nick Gardner of broker Chase de Vere Mortgage Management, "the borrower is unaffected.
"But if prices fall by more than this, and then start eating into the lender's 12.5 per cent stake, the borrowers are responsible for this extra debt and will therefore fall into negative equity."
The scheme is supposed to be designed for certain buyers, including social housing tenants and "key workers" like nurses. The HomeBuy guide provided by the Housing Corporation - the body that regulates housing associations - stipulates that "priority" will be given to those who serve the local community or make a direct contribution to the local economy.
But a spokesman for the Department for Communities and Local Government says that any first-timer can apply - regardless of career, income or savings.
There are other concerns too. First, just 20,000 homes will be available through the scheme - not enough to meet the anticipated demand from buyers. Second, few lenders are taking part: so far, only the Nationwide and Yorkshire building societies and Advantage - part of the Morgan Stanley group - are involved. The Halifax is poised to join in at the end of the year.
Applicants also need £3,500 in savings, and qualifying key workers who then switch careers will have to repay the state's part of the loan within two years - and possibly the lender's.
Mortgage brokers warn that splitting the ownership of a home in this way is a last resort for people struggling to get on the ladder. "Most will resent sharing in equity growth, and 25 per cent is a heavy price to pay," says Rob Clifford of Mortgageforce.
For interested parties, the first port of call is one of 23 HomeBuy agents run by housing associations. Find your local agent at www.housingcorp.gov.uk.
Whichever lender you opt for, the 75 per cent mortgage has a five-year tie-in. During this time no interest is payable on the shared equity loan, but after five years, interest at 3 per cent is incurred on the lender's share.
As for interest on the 75 per cent mortgage, Nationwide and Yorkshire will charge base rate plus 1 per cent (currently 5.75 per cent) for the first five years. After this, prices will climb to a level close to the lender's standard variable rate, though at this point you can remortgage elsewhere.
Writer Angie Davey, 30, aims to get on the housing ladder next year but won't consider Open Market Homebuy. "I'd be worried about not owning the entire share and it's unlikely I would be able to buy back 25 per cent within the five years."Reuse content