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Shake-up for shared equity

There is little cheer to be had as far as mortgages and the housing market are concerned. But the Budget, which was disappointing in many ways, at least managed to come up with something positive to help those struggling the most.

Arguably, Alistair Darling had little room for manoeuvre. With the economy slowing, he had few options to raise extra revenue that could be distributed elsewhere.

He ignored calls to abolish stamp duty for first-time buyers. He may have felt that the billions of pounds raised each year by the duty were too valuable to throw away. He may also have felt that falling house prices mean fewer FTBs will be forced over the stamp duty threshold in the near future anyway.

Instead, he turned his attention to affordable homeownership, focusing on helping key workers, those in social housing and priority first-time buyers – who would struggle to buy a home outright without assistance – through wholesale reform of the Open Market HomeBuy scheme.

OMHB in its original form did not take off as the Government had intended. Part of the problem was that, even with an equity loan of up to 25 per cent of the purchase price, it was near impossible for many people to be able to afford a mortgage for the remaining portion. Rapidly escalating property prices in the South-east continued to price first-time buyers off the ladder, even with a sharedequity scheme available.

However, the new version of OMHB will make all the difference. It should be easier to achieve financing while simplifying the choice available and help more of those who are struggling to buy a home.

Importantly, buyers will be able to access an equity loan of up to 50 per cent of the property’s value. They can choose their own mortgage from any on the market or take one offered by the Cooperative Bank, depending on the scheme they opt for.

Potentially, it should make quite a difference. Under the old rules, a family with a combined income of £35,000 could obtain a mortgage of £120,000 while under MyChoice HomeBuy they could potentially buy a home worth £240,000.

MyChoice HomeBuy gives borrowers the greatest choice – enabling them to take out a regular mortgage for up to 50 per cent of the property’s value funded by the whole of the market, as opposed to Ownhome, where the Coop is the only lender and applicants need a 60 per cent mortgage (with 40 per cent equity loan). Lenders such as Halifax have stressed their commitment to MyChoice HomeBuy, so there will be plenty of mortgages for borrowers to choose from.

While 100 per cent and above loan-to-value mortgages have all but dried up, support for shared equity from lenders remains strong. Lenders will treat the equity loan as if it were a deposit, so potentially a buyer will have 50 per cent to put down, enabling them to access the most competitive mortgage rates.

This will put OMHB applicants in the same position as buyers with sizeable deposits, who lenders regard as being low risk. The liquidity squeeze means low-LTV borrowers are the type that lenders want to attract.

Critics have argued that buyers are better off owning 100 per cent of a property than part of one because the equity loan has to be repaid. If property prices rise in the meantime, this could mean handing thousands of pounds more than you borrowed in the first instance to the Government. But with prices falling and 100 per cent deals disappearing, shared equity does not look like such a bad idea and may be the only viable option.

Mark Harris is managing director at Savills Private Finance

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