The government has announced further details of its new equity loan scheme for first-time buyers.
Your First Home will enable eligible first-time buyers to purchase new build homes with deposits as low as 2.5%, supported by a 20% government-backed equity loan.
People will be able to access equity loans with an initial interest free period, meaning that those who use the scheme could save hundreds of pounds per month compared to a 95% mortgage.
The scheme will also set a household income cap with local property price caps to ensure support is targeted at those who need it.
In today's Budget, chancellor John Healey confirmed £4.7 billion in government-backed lending for the scheme, while the supporting Budget documents set out the final details.
Income caps will be set at £110,000 per household outside London and £140,000 inside London. Price caps will be set based on local authority median prices to ensure support is targeted at those who need it, with inner and outer London caps of £650,000 and £500,000 respectively.
The deposit requirement will be set at 2.5%, with a maximum deposit of 15%. People will be able to access equity loans with a five-year interest free period, with a gradual increase after five years.
Developers will be expected to make a contribution when signing up to the scheme to help cover costs, set on a sliding scale to protect smaller developments. Funding will be capped annually but government will work with developers and lenders to monitor demand.
The government anticipates that the scheme will help 70,000 households to get onto the housing ladder.
Scott Clay, director of private clients at Together, commented: “Confirmation of an income cap of £110,000 per household outside of London for the ‘Your First Home’ scheme means the initiative has more of a shot at being effective, with more aspiring homeowners standing to benefit.
“That said, there’s still a geographic disparity in the number of potential beneficiaries of ‘the scheme. The income cap may come to bite for those living in the London commuter belt, who miss out on the capital’s £140,000 income cap while having to contend with the higher house prices of the South East.
“The intent behind the scheme is two-fold, and the government has as much of an eye on getting housebuilders to move ahead with stalled projects as they do with getting more people on the property ladder. However, housebuilders will have to bear the brunt of some of costs of the scheme, so it would be good to see greater incentives for developers, including tax breaks.
“Buyers will need to decide for themselves whether a new-build home - which comes with a premium - with a government-backed equity loan is the best route to homeownership. Other routes onto the housing ladder could include shared ownership, which can also offer a valuable alternative for those priced out of buying outright, so long as the full costs are understood.”
Richard Donnell, executive director at Zoopla said: “Today’s Budget has delivered a welcome boost for first-time buyers and the home-building industry. Localised price caps set at what first-time buyers want to pay for new homes means the Your First Home scheme will have around half the impact of the old Help to Buy scheme.
“If local price caps are set at what first-time buyers want to pay for new homes, Zoopla estimates that over a third of new homes will be eligible for the Your First Home scheme with up to 30,000, or one in ten, first-time buyers set to benefit each year. This will cost the government around £1.5bn a year so looks set to run for three years based on the £4.7bn announced in the Budget. The income caps announced in the Budget are high enough to ensure all these homes are affordable with a 2.5% deposit assuming a 4.5x loan to income mortgage.
“When the scheme was announced before the party conferences Zoopla saw an immediate 40% jump in searches for new homes at the prospect of support with an equity loan to buy new homes. The appetite for the scheme is there, but its success will depend on getting the price caps right to ensure enough homes qualify to make a meaningful difference.”
Sarah Bush, head of residential at Cheffins, added: “The Your First Home scheme is simply a moderate rebound from the Conservative’s Help to Buy Scheme. Currently, it’s not clear who the biggest winners will be out of this scheme – first time buyers or developers. As the scheme is only applicable to new homes, the Your First Home scheme will not light up the rest of the stagnating property market. Should it have applied to second hand homes too, it might have helped to kickstart chains throughout other brackets, however, I forecast that all this will do is help developers get more new home sales over the line. In addition, for the scheme to actually help people onto the property ladder, we need the availability of new homes at affordable levels, which are in short supply throughout much of the country. Without the homes, or the land to build them, or the planning reforms to allow these developments to be built, this looks to just be a vote winning move from the Chancellor. The announcement to support the build of council housing only goes so far, we need relaxation of measures for private new build developments for this scheme to make a true impact.
While the deposit levels required as part of the scheme are lower than those on Help to Buy, it leaves behind a larger mortgage. As the housing market remains unpredictable, how can buyers using the scheme ensure that they will be able to pay back the loan? It is crucial to remember that the equity contribution is a loan, it is not a gift. In the days of steady house price growth, buyers could have taken confidence that they would be able to pay off the government loan incrementally or at the end of the five year term, thanks to the growth in their property’s value. However, taking into account current global economics, there is no guarantee that these new homes will go up in value, potentially leaving those who have used the Your First Home scheme needing to either remortgage or find the cash to pay the government back.”
