The bar is lowered, but first-time buyers are still struggling to live the dream

The falling market is hampering government schemes to help people on to the ladder.
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The Independent Online

Panic is setting in over the future of home ownership, prompting the Government to turn even more tricks as it tries to straighten up the socially skewed housing ladder.

For example, the housing minister, Caroline Flint, has just announced plans for a new scheme called Rent Now Buy Later, designed to bridge the gap between renting and owning a first home. According to figures published last week, this gap is growing even wider thanks to a freeze on mortgage lending, coming on top of prices that are already out of reach for many.

The Council of Mortgage Lenders reports gross lending in June down 11 per cent on the same month last year, while just 11.8 per cent of sales during the month were to first-time buyers, says the National Association of Estate Agents. This compares with 38.4 per cent in June 2000.

Under the Rent Now Buy Later scheme, households earning less than £60,000 a year can apply to rent a property at 80 per cent of the market rate for up to three years, in order to save for a deposit. They will then be given the chance to buy, although they can pick up 25 per cent or more of the property at any time.

Ms Flint says the Government is "determined to continue to do everything possible to promote long-term stability and fairness in the housing market". But many commentators say the scheme is nothing more than hot air.

"Even if you are lucky enough to qualify, the sums are still quite frightening," says Louise Cuming, head of mortgages at "The 20 per cent rental discount would only save you enough for a minimum 5 per cent deposit on a house after around five years. And more important, where are the lenders to meet the demand for these mortgages? This seems to be yet more spin without substance and does not address the [main] problem of how to stimulate lending."

The same funding problems will also serve to unravel many more of the Government's confusing array of housing initiatives – most notably its New Build HomeBuy scheme. Until April 2006, this was known as Shared Ownership, which is probably a better explanation of what it does.

Under the scheme, a buyer need only qualify for a mortgage of between 25 and 75 per cent of the property value. The remainder of the home is bought by a local housing association or registered social landlord. This share can then be "bought back" by the first-timer – a process called staircasing – as and when they can meet the extra mortgage. Rent is paid on whatever part of the home the occupant does not own.

However, as its new name suggests, New Build HomeBuy applies mainly to new properties built specifically for the purpose. These will also form part of the Government's ambitious target to build three million new homes by 2020. But the housebuilding industry is itself crumbling as people struggle to secure mortgages. In the past month, Barratt Homes has announced a 15 per cent cut in its workforce, while Redrow and Bovis Homes have both slashed staff levels by 40 per cent.

However, Anthony Moss, affordable home ownership director at Best Advice Financial Planning, says: "If there is going to be a pause in the activity of New Build HomeBuy due to problems in the housebuilding sector, it won't be felt for at least another 12 months. Currently, we are dealing with homes that have been in planning for the past couple of years."

In addition, the Government has announced that it will allocate £200m to buying existing housing stock from developers to turn into affordable homes.

Ray Boulger, technical manager at broker John Charcol, has his doubts. "If some of the over-supply of housing stock in city centres like Leeds and Manchester was bought cheaply by the Government, it could be sold cheaply too," he acknowledges. "But first-timers should still be wary of new-build. Developers like George Wimpey are also offering their own schemes where buyers pay for just 75 per cent of the property, giving back the 25 per cent to the developer when they sell. These schemes may provide better value, as new homes cost between 10 and 15 per cent less than this time last year."

Falling house prices may be more conducive to an alternative government initiative called Open Market HomeBuy. This is a shared equity, rather than shared ownership, scheme. It allows the same group of priority first-time buyers to purchase any home on the open market (with up to one more bedroom than the minimum required), by using a cheap government loan amounting to between 15 and 50 per cent of the property value. The most popular version of the scheme, called My Choice HomeBuy, comes with a loan priced at 1.75 per cent for the first year, which rises to 1 per cent above inflation as measured by the retail price index (currently 4.6 per cent) thereafter. Confusingly, this is not classed as interest but as rent and administration costs.

"When homeowners come to sell, they pay back only the percentage of the property that the equity loan represents," says Mr Moss at Best Advice, which offers My Choice HomeBuy. "So in a falling market, this will be less than you borrowed."

But Richard Morea, technical manager at broker London & Country, says: "You can look at it that you are only taking a hit of 50 per cent of house price falls, but you have to question why you would want to be exposed to a falling market in any measure when you don't have to be."

This is not putting people off applying for the scheme, though, says Mr Moss: "Our clients often find that with a cheap loan of up to 50 per cent of the property value, it costs the same to rent anyway."

But while there are several lenders willing to lend on New Build HomeBuy's shared ownership terms – such as the Nationwide, Kent Reliance, West Bromwich and Leeds building societies – in practice, it's not easy to find a high-street lender for My Choice HomeBuy. "Still only a handful of them, such as Abbey and Halifax, will lend," says Mr Morea. "Others say they are looking into it, but that's not much good to struggling buyers now."

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