Steps in the right direction as keyworkers plant a first foot on to the ladder
A new governmentbacked scheme gives some publicsector employees a helping hand into the market, says Ross Clark – but not everyone is convinced it will work
The recorded message on the telephone of the Catalyst Housing Group said it all: I was held in a queue and would be put through to an operator in “approximately five minutes and 40 seconds”. Catalyst is one of several housing associations handling the Government’s new Open Market HomeBuy scheme, introduced earlier this month, evidently to considerable interest.
The £230 million scheme promises to help 20,000 frustrated first-time buyers to get on the housing ladder through shared ownership, effectively buying a property jointly with a housing association and a bank or building society.
There have been shared ownership initiatives before, but the difference this time is that the scheme does not involve just housing association properties. Prospective applicants, assuming they manage to reach the end of the telephone queue, will be offered the chance to buy any home of their choice on the open market, with the aid of a 25 per cent “equity loan”, which is interest-free but which the owner must repay at some stage, along with a share of the increase in the value of the property.
The main limitation is that buyers must be able to raise a conventional mortgage for 75 per cent of the value of the home and to prove that they would be unable to buy a suitable home without the 25 per cent loan.
An earlier version of the scheme has helped 10,000 “key workers” buy their first homes since it was introduced in 2001. Among them were Justin and Aimee Baker, both teachers, who bought a three-bedroom, 1970s house in Waterlooville, Hampshire, with the aid of a £40,000 loan from the Thames Valley Housing Association.
“The largest mortgage we could afford was £119,000,” says Justin, 28. “For that, all we could have afforded was a flat, which we didn’t want because Aimee was pregnant. But with a £40,000 equity loan we were able to buy a house with a garden. We plan either to extend it or to move to a larger property in about five years’ time. Under the scheme, we will be able to take the equity loan with us as long as we remain in teaching and live within an hour of our workplace.”
While first-time buyers have reacted with enthusiasm to the scheme, not everyone is convinced that offering bungs to first-time buyers is a sensible way to solve Britain’s escalating housing crisis, which has seen the average house price rise to eight times the average salary. As Sue Anderson of the Council of Mortgage Lenders puts it: “What you don’t want is a scheme that makes the problem worse further down the line by fuelling house price inflation”.
Given that the scheme will initially benefit only 20,000 buyers, the Government might just get away without distorting the market too much, she says. Then again, to select just 20,000 lucky first-time buyers out of several million who would potentially like to buy a home is hardly going to solve the problem of lack of affordability.
Having failed miserably to abate house price inflation over the past decade, the Government has been driven to devise the Open Market HomeBuy scheme by a shortage of teachers and nurses and other public sector “key workers” in expensive parts of the country. Anyone with toothache or engaged in the increasingly desperate task of trying to find an out-of-hours GP, however, will be puzzled to discover who counts as an “essential” key worker eligible for the scheme: doctors and dentists, for example, are excluded, yet town planners are included.
This time around, as last time, some vital key workers will inevitably miss out on help. While Justin Baker got his application form in just in time, a colleague — who, like Aimee, was pregnant — just missed out. “It almost caused a bit of resentment,” says Justin.
First-time buyers who do not qualify for the Open Market HomeBuy scheme will pay twice over for it: once, their taxes and again through the extra money they must stump up to outbid those who do qualify for the interest-free loans. But there is still a chance they will end up being the lucky ones. Should the market rise, assisted buyers will have to pay a share of the increase in the value of their homes. Yet should the market fall, those buyers may still find themselves having to repay half their equity loan in full.
The Government initially wanted mortgage lenders to take the risk of a falling market, but the lenders declined. The Government backed down, but even so only four lenders — Advantage, the Bank of Scotland and the Nationwide and Yorkshire building societies — signed up for the scheme. The others presumably have memories of the mid 1990s, when, long after the property market had begun to recover from its early 1990s slump, there was one class of property that still sat gathering dust in estate agents’ windows — shared equity properties.
Open Market HomeBuy works as follows. First, you must find out whether you are eligible. The scheme is open to many public sector key workers, plus existing tenants of housing associations and councils and people on housing waiting lists.
But in all cases applicants must be able to prove that they are unable to afford a home on the open market otherwise. You find a home you wish to buy for, say, £160,000. You must then raise a mortgage – through one of the four lenders that have signed up for the scheme – for 75 per cent of this total; that is, £120,000. The remaining 25 per cent, or £40,000, is provided in the form of an equity loan. Half (£20,000) comes from a housing association and the other half from the lender. For five years you pay no interest on the equity loan. Thereafter, if you still own the property, the lender may ask you to pay interest on its £20,000 share of the loan. You are responsible for all service charges and maintenance.
When you sell the property, you must repay the £40,000 equity loan. On top of this you must pay the housing association and lender their share of the increase in value of the property since you bought it. If, for example, the property rises by 20 per cent in price, you must repay a total of £48,000. If, on the other hand, the value of your property falls, the housing association will write off some of the loan. The lender, on the other hand, may ask you to repay its share of the equity loan in full. So if the property falls in value by 20 per cent, the housing association would ask for £16,000 (£20,000 less 20 per cent) but the lender may still demand £20,000.
You can find out more by visiting the Housing Corporation’s website at www.housingcorp.gov.uk