How to get help with a property deposit

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The Independent Online

The Government's latest initiative to help first-time buyers on to the property ladder will give hope to many who are struggling to buy. But experts are warning that many will be disappointed.

The Open Market Homebuy scheme, announced this month, allows those eligible to buy from a private seller, rather than from a housing association or other low-cost housing scheme.

A government subsidy reduces the initial costs of the mortgage, and the private-sector lenders involved waive interest on part of the purchase cost. The terms of the scheme are restrictive, however, and the Government says only a small number of buyers - around 20,000 - will qualify.

How does Open Market Homebuy work?

A homebuyer chooses their property in the usual way, but they only need to arrange, and be able to afford, a mortgage for 75 per cent of the purchase price. The difference is made up of two further "equity" loans: one of 12.5 per cent of the price from the Government, and another 12.5 per cent loan from the private sector. These loans are interest-free for the first five years.

After five years, the government loan remains free, but the private lender can charge interest. This is capped at 3 per cent until year 10 of the mortgage. But buyers using the scheme have to give up a quarter of the sale proceeds from their home when they move on, including any rise in value. The money will be used to repay the equity loans.

Who is eligible?

In theory, anyone who is a first-time buyer can apply. Cases are decided on by housing associations, which issue eligibility certificates. In practice, the priority will be for key workers such as teachers and nurses, as well as social housing tenants.

Buyers have to qualify for a mortgage as well as meet the scheme's rules. One advantage of Open Market Homebuy is that buyers are only assessed on the basis of the 75 per cent of the property's cost that is covered by the normal mortgage, as there are no interest or capital payments for five years on the remaining 25 per cent. There is no need for a deposit, and unlike 100 per cent mortgages on offer in the mainstream market, there are no higher lending charges. According to Ray Boulger, senior technical manager at mortgage broker John Charcol, this makes the scheme good value, when set against other, 100 per cent loans.

I think I might qualify: what are the drawbacks?

The complexity of Open Market Homebuy might put off some buyers. Others might find the choice of lenders limited. There are four: the Yorkshire and Nationwide building societies, HBOS and Advantage, which is part of Morgan Stanley. Buyers have to take their main mortgage with the same company that provides their equity loan.

Only Advantage offers a fixed-rate deal, 5.59 per cent in the first year, 6.59 in the second and variable after that. All deals have a five-year lock in, with redemption penalties for selling the property or remortgaging before then. For buyers who do not need a 100 per cent mortgage, standard home loans will be more flexible and possibly, cheaper.

What happens if property prices rise - or fall?

If house prices rise, then the equity lenders will want their share of that rise. Over five years this could be a substantial sum. If someone bought a property for £100,000 and it doubled in value, they would have to pay a quarter of the sale price to the lenders. That includes the £25,000 they borrowed interest free, and a 25 per cent share of any increase. By comparison, it would cost only £6,250 to borrow £25,000 for five years at an interest-only rate of 5 per cent. There are always alternative means of buying a property: saving just a 5 per cent deposit could enable a buyer to apply for a normal mortgage over three times salary.

And house prices fall, scheme lenders will still need to be repaid. The Government will bear its share of any loss, asking for 12.5 per cent of the sale price. Of commercial lenders, only Advantage is prepared to take a reduced capital sum if house prices fall.