New hope for first-timers?

The options for buyers who want to get on the ladder are growing all the time

In his Pre-Budget Report last week, the Chancellor Gordon Brown held out the prospect of government help for first-time buyers.

Proposals on shared equity - where the Government takes a stake in first-time buyers' houses, reducing the funds they need to raise themselves - were fleshed out in the report. By rearranging the Open Market HomeBuy scheme, the Government hopes to bring another 20,000 people within its scope.

But the number who will benefit is still relatively small, at about 40,000 home-buyers - and they will have to meet certain criteria, such as key workers and people who rent through a social landlord.

Action is certainly needed. A shortage of first-time buyers is holding back the housing market as a whole, as other home-owners find it more difficult to sell their properties and move on.

Research by YouGov for the Co-operative Bank found that first-time buyers are waiting longer to get on the housing ladder; about 28 per cent take two years to save a cash reserve for a deposit, and 13 per cent wait as long as three years.

But waiting for government action might not be the best course. The Council of Mortgage Lenders recently revised upwards its housing market forecast. The lenders' body had predicted that prices would be broadly flat between 2005 and 2007. It is now saying that house prices will rise 4 per cent this year, and 2 per cent in 2006 and 2007.

This is far from the double-digit growth of a few years ago, but first-time buyers still risk being squeezed. Unlike existing home-owners, first-time buyers have no equity so do not benefit from price rises.

First-time buyers' deposits are having to rise, in order to keep pace with the higher cost of properties. The YouGov survey found that 10 per cent of first-time buyers had deposits of between £11,000 and £16,000; 20 per cent between £6,000 and £11,000; and 27 per cent between £1,000 and £6,000. But 17 per cent had no deposit at all.

The Open Market HomeBuy scheme works by letting qualified buyers apply for a 75 per cent mortgage. The mortgage lender and the Government each take a 12.5 per cent stake in the property. This is an interest-free loan, but 25 per cent of the sale price, including any gains, goes to the Government and the bank.

This could make it harder for buyers to move up the ladder, as they will have less equity. But the greatest drawback is that relatively few people stand to qualify. "These schemes are usually a long time in coming into operation. You could wait, and then find that you still do not qualify," warns Helen Adams, managing director of the information service, FirstRungNow.

Adams suggests that borrowers who want to move quickly on to the property ladder should look at alternatives already available. Lenders, she suggests, are starting to realise the untapped potential in the first-time buyers' market.

Two options are 100 per cent mortgages, and graduate and professional mortgages, which allow borrowers to take out mortgages for greater sums than normal income multiples allow.

The Co-operative Bank is one of several lenders that have revamped their first-time buyers' loans. The bank has both a fixed and a tracker-rate loan, a 100 per cent mortgage, a graduate mortgage and a mortgage that allows first-time buyers to buy with a guarantor, usually a parent.

David Lowe, mortgage product manager at the Co-operative, says: "Our 100 per cent mortgage has proved very attractive. For people who might think they cannot get in to the housing market at all, this offers them a glimpse of potential."

Borrowing without a deposit does, however, leave home-buyers very exposed to any downturn in the property market. As an alternative, joint ownership of some form is growing in popularity.

One in four first-time buyers now asks a parent for help, Adams says. This, and buying with friends, schemes from developers, and existing social shared ownership programmes, will have to bridge the gap until the Government's plans become reality.