Question – what will cost taxpayers hundreds of millions of pounds, benefit just 8,000 people a year over the next five years and potentially aggravate the problem it was set up to help solve?
The answer, of course, is the government’s expanded shared equity scheme Open Market HomeBuy. Launched on October 2 and backed by £230m, the scheme is designed to help not only key workers such as nurses and policemen but also other deserving people get a foothold on the ever more elusive lower rungs of the property ladder.
The response has been underwhelming. Critics quickly dismissed it as half-hearted, overly complex and barely scratching the surface of the affordability crisis which threatens the sustainability of the entire housing market.
The 40,000 buyers it will help is only a tiny fraction of the annual one million housing transactions.
Open Market HomeBuy has been charged with worsening problems for those first-time buyers excluded from the scheme by artificially stimulating demand and accelerating house prices. So does the scheme have anything to offer brokers and borrowers?
The scheme is an extension of the key worker programme, launched in 2004, which has helped 22,000 public sector staff into low-cost home ownership including teachers, nurses, police and prison officers, social workers, firefighters and local authority planners.
The key worker programme was recently expanded to include military personnel.
Open Market HomeBuy is still being piloted but if it proves to be a success in the next 18 months the government has indicated it could allocate extra funds on top of the initial £230m.
Under the scheme’s rules, government and lender each stump up a 12.5% equity loan interest-free for the first five years, with the buyer paying interest on the remaining 75% of their borrowings.
After five years they start paying interest on the 25% of the property they don’t own, although at a lower late than their main mortgage – currently 2.89% with Advantage and 2.99% with the rest.
Unlike a shared equity scheme in which the borrower owns part of the property and rents the rest, HomeBuy gives the buyer sole ownership from the start.
Another key attraction is that it allows buyers to source a property on the open market rather than having to opt for social housing or new-build properties developed by local housing associationsThe scheme is open to key workers, social tenants, those on the housing register and other priority first-time buyers as identified by appointed HomeBuy agents. It will largely focus on London, the South-East and the east of England.
So far, a mere four lenders have signed up – Advantage (a subsidiary of Morgan Stanley), Bank of Scotland, Nationwide and the Yorkshire.
Tim Hughes, head of intermediary markets at Nationwide, says the society’s decision to get involved reflects its commitment to affordable home ownership.
“It is a natural step as we have the largest commitment of any lender to the affordable housing sector,” Hughes says. “It is in everyone’s interests that first-time buyers get a foot on the housing ladder and we are keen to play our part.”
This commitment includes £6bn funding for housing associations that allow people to buy on a shared ownership basis, participation in Social HomeBuy which helps social tenants buy a share in their property and NewBuild HomeBuy which helps people buy a share in a newly-built property.
Hughes says Open Market HomeBuy will offer invaluable help to people who are priced out of the market, cutting purchasing costs by around 20%.
“Nationwide will typically lend a couple with combined earnings of £32,000 up to £136,000, which is unlikely to fund anything suitable in the South-East. HomeBuy could boost their purchasing power to £180,000.”
At that level, their typical monthly repayment would be £850 compared with £1,050 if they bought unassisted – a saving of £200 per month.
Nationwide adopts the same affordability calculations for HomeBuy customers as for any other borrowers.
“No payments are due on the lender’s equity loan for the first five years which means the applicant only needs to afford the 75% conventional mortgage, not the total 87.5% borrowing so somebody buying a property worth £100,000 will borrow £87,500 from us, but only need to be able to afford £75,000,” Hughes says.
Just the four lenders mentioned previously have so far got involved but Hughes is confident more will follow once the scheme proves its merit.
Davies Holmes, corporate affairs manager at the Yorkshire, says HomeBuy is rapidly generating interest. It has already received 27 applications from eligible home buyers totalling £3.5m, and more are on the way.
“HomeBuy agents tell us there are hundreds of approved borrowers out there looking for a property, so we can expect quite a rush of applications prior to Christmas,” says Homes.
He adds that brokers have a clear incentive to get involved, with the government saying they have a key role to ensure HomeBuy customers get the most suitable financial products, plus the usual financial incentive of the proc fee, typically set at 0.35%, calculated on 87.5% of the asking price.
At first glance, HomeBuy does not look all that lucrative for brokers, says Ray Boulger, senior technical manager at John Charcol, but that first impression could be misleading.
“The drawbacks are that the loan isn’t for the full property value and the buyer is likely to have a lower income and borrowings, which limits the income from proc fees,” he says.
“But on the plus side, they will be first-time buyers who you will hopefully retain for the longer term, and to whom you can cross-sell additional products such as income protection or critical illness cover.”
Even brokers who don’t want anything to do with HomeBuy must know the basics.
“If your client can’t get on the housing ladder any other way, you should be able to direct them towards somebody who can help even if you can’t,” says Boulger.
Boulger is disappointed by the lack of product choice. “Bank of Scotland won’t come onstream until the end of the year. That leaves Advantage, Nationwide and the Yorkshire, which have all got similar products – five-year trackers charging base rate plus 1% with early repayment charges during those five years.
“True, Advantage does offer a two-year fixed rate but that carries a three-year overhanging ERC which many brokers don’t like so the choice is quite limited,” Boulger adds.
Lenders must factor in that they aren’t earning any interest on their 12.5% equity share for the first five years.
“We shouldn’t compare these deals with 75% LTV mortgages but with 100% mortgages – they then start to look decent value for money even if that 1% above base rate looks quite high,” says Boulger.
Now that rules on Open Market HomeBuy have been finalised, more lenders could follow Advantage and produce their own commercial shared equity loans. These shouldn’t just be targeted at first-time buyers.
“A lot of people would like to trade up but can’t afford to do so, particularly if their income hasn’t increased in line with property prices,” Boulger says.
In July, Advantage launched Flexishare which combines a standard mortgage with a residential ownership loan of up to 35% of property value, charged at a lower rate. Borrowers need a 5% deposit but can get on the ladder even if they can only raise the remaining 60% on their income.
The buyer owns 100% of the property but the lender shares in any appreciation or depreciation. Buyers also have the freedom to overpay and can buy back the lender’s share in the property. Advantage pays the standard 0.35% proc fee.
Crucially, Flexishare is not restricted to key workers and low-income families but is open to anybody willing to surrender a share of equity in their property.
Boulger says many borrowers might need persuading of the merits of equity sharing. “They won’t actually be losing out although many are likely to think they will be. They will own roughly the same amount of equity and benefit in exactly the same way from any rise in capital values. The difference is they will live in a more expensive property. Brokers are going to have to get that message across.”
Many brokers continue to view Open Market HomeBuy with scepticism, says Jonathan Cornell, technical director at Hamptons Mortgages. “The fact that only four lenders have signed up shows that they don’t have much faith in it either.”
But he is more encouraging about the “excellent and innovative” Flexishare product.
“The majority of brokers haven’t looked hard at it yet although I’m sure this will change in the coming months,” he says. “There is a market for this kind of product and the more competition between lenders, the better for brokers and borrowers.”
Helen Adams, managing director of first-time buyer service FirstRungNow, says borrowers will still need to obtain a mortgage of 75% of the property value and that it remains out of reach for many people.
“I’m also concerned that, with loans repayable upon the sale of the property, borrowers may struggle to move up the housing ladder,” she adds. “But it’s possible that mortgages such as Flexishare could change the face of first-time buyer borrowing, and I would expect other lenders to launch similar options soon.”
Melanie Bien, associate director at Savills Private Finance, says the lack of lenders signing up to Open Market HomeBuy has “severely limited” choice for borrowers, most of whom should only use the scheme as a last resort.
“SPF Sherwins, our affordable housing arm, often takes enquiries about the scheme only to subsequently discover that another deal is more suitable,” she says. “That’s why the brokers with access to all products in the marketplace are the ones best placed to advise borrowers.”
HomeBuy is expensive and uncompetitive, and locking in first-time buyers with a five-year ERC is also poor practice.
“The lender’s equity share attracts interest from year six,” says Bien. “This is set at a maximum of 3% until year 10 but there is no repayment vehicle for this. In 10 or 25 years, 12.5% of the property value could be considerable and the equity loan needs to be repaid when the mortgage finishes. How are home owners on limited incomes going to manage?”
Under a ruling by the Department for Communities and Local Government, HomeBuy borrowers can’t take an interest-only mortgage, which Bien believes is unfair discrimination.
Paul Fincham, spokesman for HBOS, whose subsidiary Bank of Scotland will launch its HomeBuy product shortly, isn’t concerned by the lack of rival lenders signing up to the scheme. “There is a good depth of choice for borrowers,” he says. “These are early days and I’m sure other lenders will get involved.”
David Hollingworth, mortgage broker at London & Country Mortgages, warns that future entrants won’t help the first wave of borrowers who are locked into their deals for five years. “At that point, if all goes well they will look to remortgage to a more competitive rate, and hopefully buy out the lender and government’s share of the equity,” he says.
Brokers must carefully explain the risks, both of a continuing property price surge and of a collapse.
“If prices continue to rise people could end up handing over a big chunk of equity,” says Hollingworth. “If prices fall, the government will share in the downside because it will take back 12.5% of the lower property value but lenders won’t, with the exception of Advantage. The others will still want back 12.5% of the initial property purchase price.”
Like many brokers, Hollingworth is concerned by reports that 10 out of the 23 HomeBuy agents operate restricted IFA panels.
The government has stressed that buyers are free to take advice from any authorised adviser, but that may not happen in practice.
“If a HomeBuy agent gives applicants a list of approved advisers they are pretty unlikely to look beyond it,” says Hollingworth.
“But who are these brokers? How do they choose them? Are they panel-based or do they advise on the entire market? This is something we will be looking to take up with individual agents,” he says.
Louise Cummings, head of mortgages at moneysupermarket.com, says first-time borrowers looking for an equity share mortgage beyond HomeBuy such as shared ownership schemes run by housing associations and private developers will be disappointed by the lack of choice.
“Only 23 lenders consider shared ownership applications and of the 26,000 mortgage products currently on the market, only 585 are available on an equity share basis,” she says. “If the applicant has no deposit, just three lenders will consider 100% equity share mortgages.”
Borrowers must also carefully assess the rental element when assessing affordability. “Although these rents are calculated to be affordable, the monthly outlay on payment plus the rent can add up to almost as much as a standard mortgage,” says Cummings.
HomeBuy faces another charge – should £230m of public money be used to subsidise private house purchases and thereby help to sustain an already overpriced market?
Julia Harris, mortgage analyst at moneyfacts.co.uk, thinks not.
“By assisting only a fraction of first-time buyers the problem is made worse for those excluded from the scheme because increased demand, however small, will stimulate further prices rises,” Harris says.
With property continuing to outstrip pay rises it is a moot point as to whether government, lenders and brokers should encourage borrowers to take even bigger leaps to get on the property ladder whether through HomeBuy, interest-only, clubbing together, 5 x salary deals or intergenerational mortgages.
You have to wonder – would it better to let the market slip back to a level that people can actually afford. Or is that heresy?
Brokers will be excluded from the scheme
Richard Bennett is a director at broker Flexible Money Management
One of my major concerns about Open Market HomeBuy is that most brokers will be unfairly excluded from the scheme because too many HomeBuy agents are tying borrowers to a restrictive panel of IFAs.
Every broker or intermediary who is regulated by the Financial Services Authority has a right to pitch for this business and housing associations should not have been given the ability to direct customers towards a handful of their favoured intermediaries.
I have a contract with the Portsmouth NHS trust to offer mortgage advice to any of its 24,000 staff who want to use our services. Many of these people will be interested in considering the government’s HomeBuy scheme but I am not on the local agent’s list. The implication of this is that these people will be barred from using my services should they want to look into purchasing a home under the HomeBuy scheme.
It also means that any of my clients who want to use HomeBuy will have to go elsewhere for their advice. I have spent a lot of time working with these clients and I don’t want to hand them over to an IFA who will inevitably try to cross sell them other products as well, and eventually adopt them as their own clients.
In many cases, the HomeBuy scheme won’t even be the best deal for these borrowers. The lenders offering this type of mortgage don’t have the most competitive deals and for many key workers the Advantage Flexishare shared equity mortgage will be a much better bet.
HomeBuy agents clearly feel they are responsible for making sure that borrowers can afford their mortgages so they won’t have to go through the hassle and embarrassment of repossession if they can’t keep up with repayments. But it’s the responsibility of the lender and adviser to decide whether somebody can afford their loan, not the HomeBuy agent.
And if the FSA says a broker is fit to offer mortgage advice, how can a local housing association contradict that?
For the limited number of IFAs on a local panel, Open Market HomeBuy could prove to be highly lucrative. We could be talking about firms dealing with hundreds of mortgages each over the next five years.
It is wrong for the local agent to be judge and jury when it comes to who gets this business and who is excluded from applying for a mortgage to purchase a property using a government scheme.
A worrying lack of clarity for brokers
Mark Chilton is chief executive of Purely Mortgages.
Open Market HomeBuy is generally welcome because it further widens the market for shared equity and expands the list of eligible borrowers into the bargain. The ability to get a 25% equity participation is a big plus.
The key issue is that the three traditional lenders participating in the scheme, Bank of Scotland, Nationwide and the Yorkshire, don’t share in the depreciation of the property if the property value falls, but they do share in the upside if the value increases.
This doesn’t apply to the Advantage HomeBuy product. As with its standalone Flexishare product, the lender shares in the downside as well, so it cuts both ways. That seems to me to be much more attractive to borrowers.
With the three traditional lenders, if somebody buys a £100,000 house and it falls in value they still owe the lender £12,500 for their share of the property. But with the Advantage deal, the amount they owe will fall in line with the property value. Borrowers who are worried that values are overpriced in their local area and could fall might therefore prefer to go for the Advantage option.
One problem with the scheme is that the method of judging whether a borrower can afford a loan. First, the applicant must go to the HomeBuy agent who will usually be based at a housing association and will determine how much they think the borrower can afford.
They will then search for a property and then a mortgage. At that point, the lender will apply its own affordability calculations. Where there is a difference, the borrower must take the lower of the two calculations.
This creates a worrying lack of clarity for borrowers. It should be lenders’ judgement that matters. After all, they have much greater experience in this area. It is a disadvantage that, on distribution, affordability is judged as the lower of the figures calculated by the Home Buy agent and the lender. I believe that this disenfranchises intermediaries to a certain extent and contradicts the government’s stated intention that Open Market HomeBuy borrowers should receive independent advice.
Each product has its merits and looks competitive on rate as compared with the 100% option. And that’s where these schemes have most traction.
But if affordability is the real issue, the standalone Advantage scheme is far better. As yet, nobody has produced a solution that deals with both affordability and 100% lending.
Flexishare-style deals may be better value
Helen Adams is managing director of first-time buyer service FirstRungNow
A number of property developers have been offering shared equity for some years, allowing borrowers to buy their homes in staged payments.
Shared equity is the latest attempt at making home ownership affordable for a targeted group of first-time buyers. It allows them to buy and own 100% of their property using a combination of mortgage and various lower cost loans to make that purchase affordable. In return they must sacrifice a proportion of any increase in the property value to the lender.
I would have liked to have seen more differentiation between the mortgage offerings available under the HomeBuy scheme. For example, the loans are still payable on sale of the property and I am slightly concerned that this will hinder people who are trying to move up the ladder.
Another drawback is that a borrower still needs to obtain a mortgage for 75% of the property which is often out of reach for many first-time buyers.
Mortgage advisers may find that Advantage’s Flexishare loan gives them greater scope to help their clients. This deal allows first-time buyers who can raise a deposit to take out a mortgage for as little as 60% of property value with the lender contributing as much as 35%.
Flexishare looks quite affordable but again the borrower has to sacrifice a proportionate share of any increase in the property value. This may be worthwhile but I have a niggling concern over whether they will ever be able to pay off the lender’s share of the loan.
That said, this mortgage could change the face of first-time buyer borrowing and I expect other lenders to launch similar options in the near future.
How the Open Market HomeBuy scheme works
• Purchasers may be expected to raise finance to purchase around 75% of a home on the open market.
• Participating lenders Advantage, Nationwide, Royal Bank of Scotland and the Yorkshire are now offering a regular mortgage combined with an equity loan of 12.5% of the property’s value alongside a government equity loan of up to 12.5% of the property’s value, which will be provided via HomeBuy agents.
• No charge or interest is levied on either of the equity loans for the first five years. After five years an applicant could be charged a maximum of 3% interest on the lender’s equity loan, rising to but not exceeding the lender’s SVR after 10 years. An applicant will never be charged interest or need to make monthly payments on the HomeBuy agent’s equity loan.
• An applicant will be required to repay the lender’s equity loan upon payment of the final instalment of the mortgage, and have to repay both the lender’s and the HomeBuy agent’s equity loans upon the sale of the home.
• If an applicant qualifies for the scheme because they are a key worker, they will have to repay the HomeBuy agent’s equity loan within two years and possibly the lender’s too if they leave qualifying employment.
• When they repay the equity loans, they will have to share any increase in the property’s value with the lender and the HomeBuy agent.
• This scheme is primarily for key workers in the east of England, London and the South-East but will be available on a more limited scale to social tenants and other priority first-time buyers.
• Further details are available from HomeBuy agents.