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Key points for FTBs

Helen Pow asks if the new public-private partnership is the best deal for first-time borrowers

The Open Market HomeBuy scheme, launched this month, aims to help more people buy their own home but some advisers believe the scheme’s many restrictions mean it should be avoided.

The key worker living programme allows nurses, police officers, teachers and other public sector workers to buy a property with 25 per cent of the cost provided as a top-up loan from the Government and a mortgage lender.

The key worker first goes to the HomeBuy agent in their area, usually a housing association, who assesses their eligibility and determines how much they can borrow, based on household income. Next, an IFA or mortgage broker helps them secure a loan for 75 per cent of the property value from one of the four lenders on board – Nationwide, Yorkshire, Advantage or Bank of Scotland, which is joining the scheme later in the year.

Two equity loans of around 12.5 per cent each of the property value are provided, with one from the same lender offering the 75 per cent loan, and the second from the Government, which is administered by the HomeBuy agent. No interest is charged on the lender’s top-up equity loan for the first five years. After this time, interest is charged and the rate depends on the lender. The Government loan is interest free and there are no repayments.

When the property is sold, the lender and the Government take a corresponding percentage share in the increase in value plus the original loans.

If the property falls in value then some lenders will share in any fall while others will not and the original loan will be repayable. The Government loan will always fall if the value of the property goes downThis scheme is designed primarily for people who cannot find a deposit, get help from their family or share equity with friends and do not have a guarantor.

London and Country Mortgages broker James Cotton says: “The aim is to help those who need it most – people who have exhausted other avenues.”

The scheme’s main benefit is that monthly repay-ments are smaller than with conventional mortgages, by around 200 on average.

Nationwide spokeswoman Tamsin Hensley says: “Any first homebuyer is concerned with what they are paying each month and, if we can make that cheaper, that is good.”

Originally, the Government was to lend the whole 25 per cent but, now lenders are involved, the Government can spread its money further.

Some IFAs believe the scheme is too restrictive and says borrowers should think beyond what comes out of their pocket each month to consider other options.

Only key workers and a limited number of other first-time buyers are eligible for the scheme. People in other occupations who fit the criteria are not.

Moneyfacts.co.uk mortgage analyst Julia Harris says: “With the target audience of this scheme already a niche market, we wonder how many first-time buyers will benefit. Surely, by assisting only a fraction of first-time buyers facing affordability problems, for those excluded from this scheme the problem only worsens?”

Council of Mortgage Lenders spokesman Christopher Dean says it is understandable that the scheme focuses on key workers but suggests it should be expanded to include all first-time buyers.

Some IFAs say the fact that key workers will only have 75 per cent equity in their property is another significant restriction. If house prices continue to rise, borrowers could see themselves paying back a sum significantly higher than the loan’s initial value and lose a decent chunk of their profits although they will have benefited from owning a property during the rise.

Chase de Vere Mortgage Management director Nick Gardner says: “If you include the interest and possibly the lost growth in house prices, you will find that you will have been better off taking a 100 per cent mortgage deal on the open market and keeping all your equity. Borrowers need to think about the total cost and not just the initial repayments.”

Harris says: “For those who qualify for this scheme, it is important to remember that just because the scheme is designed especially for them, it does not always mean it is the only solution. If the monthly repayment amounts are the stumbling block, then why not choose interest-only for the short term or use partial repayments, which can be set to a level that is affordable?”

The rates in place for the 75 per cent mortgage, generally 1 per cent higher than base rate, are not particularly competitive with the open market.

Savills Private Finance head of media relations Melanie Bien says: “The rates are not great. Three of the four are variable, not fixed. People need to budget. They need certainty and this will not give them that. If I could get on the housing ladder any other way, I would.”

But Cotton is optimistic. He says: “It is early days. We should see some improvements and hopefully more lenders, increasing competition in terms of rates on offer.”

Key workers are further restricted by only being able to borrow 3.5 times their household income, meaning most will struggle to afford a property in certain areas.

Gardner says: “In order to get big enough loans based on the rather limiting three to 3.5 times income that the HomeBuy agents will use as a guide, you will really need to be a two-income household, especially in London and the South-east, because properties are too expensive.”

Most IFAs believe the scheme will be good for advisers but it is important they become familiar with it and its associated products.

Cotton says: “It is important that IFAs know the process and know how they fit in and how it differs from someone wanting a normal mortgage.”

Bien notes that it is quite a niche market and very few brokers do it well. She says: “Not many IFAs will want to be involved because they will not see much money in it.”

But Hensley says: “It is a good relationship tool and IFAs will get a good reputation because it is a Government scheme.”

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