Money News Feature

First Buy scheme: loans to help first-time buyers raise a deposit

By Martin Fagan - editorial@consumerchoices.co.uk

Many Brits simply can’t afford to save for a deposit on a house. So, could the government’s new First Buy scheme provide the help they need?

Many first-time buyers have their property-owning dreams dashed when they struggle to raise the money they need for a deposit.

Gone are the days when 95% and even 100% mortgages solved the problem of amassing the cash for the deposit. Now 25% deposits are back with a vengeance.

Realising the need to help the house-building industry as well as first-time buyers, the Chancellor unveiled the First Buy scheme in the March 2011 Budget.

The scheme offers first-time buyers a loan to cover 20% of the property’s value to fund the majority of the deposit, with the buyer still needing to raise the additional 5% off their own back.

The Treasury has committed £250 million to the project and it is expected to help 10,000 potential home owners take their first step onto the property ladder.

Am I eligible for a loan?

The scheme will offer interest-free loans to first time buyers with household incomes of less than £60,000 who are struggling to raise a deposit on their first home. It will only apply if you’re purchasing a new-build property.

There are no details yet of further eligibility criteria or the application process itself.

How does the scheme work?

The First Buy scheme offers low-interest loans for mortgage deposits. The loans are likely to be interest-free for five years and will then be charged at a “below-market rate of interest”, probably around 1.75%. The loans must be repaid in full when the property is sold.

The bones of the new scheme are remarkably similar to an existing scheme set up by the last government and called HomeBuy Direct, which was an equity loan scheme. Basically, this means the size of the loan changes based on how much your home is worth, and the amount you owe rises and falls with the value of your home.

However, early indications are that the new First Buy scheme will be a straightforward loan which will not fluctuate with property values.

For example if you buy a property worth £200,000 you’ll borrow 20% of the deposit (£40,000) though First Buy and pay a further 5% of the deposit in cash.

If the property’s value has risen 10% over three years to £220,000, you’ll still owe £40,000 rather than £44,000.

The First Buy loan means that buyers should be in a better bargaining position when it comes to picking a mortgage.

David Hollingworth, head of communications at London & Country Mortgages, says: “The good news is, if you have a 25% deposit, your mortgage choices expand considerably and you generally pay a lower rate of interest than if you have a small deposit, so your monthly payments are cheaper.”

Will the scheme really help first-time buyers?

The mortgage industry has given it a cautious welcome, but pointed out some deficiencies with the proposed scheme. Not least because there were £46bn of first-time buyer loans in 2007 and just £24bn in 2010, according to figures from the Council of Mortgage Lenders.

Nicholas Leeming, business development director at property website Zoopla.co.uk, says: “The government’s First Buy scheme won’t go beyond scratching the surface of the problem faced by the vast majority of first-time buyers as it’s exclusively for new-build properties and only around 11,000 buyers will benefit – a fraction of the overall number of potential first-timers.”

David Whittaker, managing director of buy-to-let specialist Mortgages For Business, is even more blunt: “The pool of buyers that qualify for the government’s First Buy scheme is so small you couldn’t even have a bath in it.

“If the government thinks this is going to transform the property market, they’re mad. The housing crisis will continue and it will be left to the private rental sector to pick up the pieces.”