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st time buyers have always found it hard to get on the first rung of the property ladder. Now, as the property market drops like a stone, the Government have introduced a scheme called Open Market Homebuy, which is an attempt to help people who are struggling to buy. However, many experts have warned that they may be disappointed.
The initial cost of a mortgage is reduced by a government subsidy and the interest on some of the purchase price is waived by the private sector lender. Unfortunately only relatively few buyers, possibly about 20,000, will qualify for the scheme.
The Way in which Open Market Homebuy works
After choosing their property in the normal way, the homebuyer only needs to arrange and afford a mortgage, which is 75% of the purchase price. The balance is paid for through two equity loans. The government contributes 12.5% of the price through a loan and the private sector makes up the balance by a further loan. Both of these loans incur no interest during the first five years.
At the end of the five years the loan from the government remains free, but then interest can be charged by the private lender. This interest, which is charged at 3%, is capped until year 10. Once a buyer moves house, he has to use 25% of the proceeds from the sale [link widoczny dla zalogowanych], including any rise in value, to repay the equity loans.
So who is Eligible for this Scheme?
The answer is any first time buyer. However each case is decided upon by a housing association, who are empowered to issue an eligibility certificate. Priority will be given to key workers, like nurses and teachers and also social housing tenants.
Buyers must meet the following criteria. Qualify for a mortgage and meet the rules of the scheme. An advantage of the scheme is that you will only be assessed on the 75% of the value of the property which the normal mortgage covers, because no capital or interest repayments are due for 5 years on the balance of 25%. A deposit is not required [link widoczny dla zalogowanych], nor are higher lending charges. Ray Boulger from mortgage broker John Charcol maintains that the scheme is good value when compared with other 100% loans.
Are there any drawbacks?
Buyers may be put off by the complexity of the scheme and the limited choice of lenders. Advantage, HBOS, the Nationwide and Yorkshire building societies are the companies involved in the scheme. The main mortgage has to be taken out with the same company as provides the equity loan.
The only fixed rate deal on offer is from Advantage the first year is at 5.59%, followed by 6.59% in the second and variable thereafter. There is a lock in of five years on all deals [link widoczny dla zalogowanych], with redemption penalties applying if you should re-mortgage or sell the property before then. If a buyer does not require a 100% mortgage, then standard home loans may prove to be a cheaper and more flexible option.
How does the rise and fall of property prices affected my agreement? Equity lenders will expect a share in the rise in value of a property. This rise could be substantial over a period of five years. If you are able to save a 5% deposit you could apply for a standard mortgage of three times your salary.
Lenders will still have to be repaid even if house prices fall. However the Government will stand its share of a loss and ask for 12.5% of the value of the property when sold. Only Advantage, from other commercial lenders, will accept a lower capital sum should property prices fall.