Keys to the door

Many first-time buyers might be being priced out of the housing market but one group has won more public and government sympathy than the rest – key workers. They even have their own £250m government-funded scheme, the Starter Home Initiative, which aims to help around 9,000 public service employees get a foot on the housing ladder.

The three-year scheme primarily targets teachers, NHS workers and police but financial support is also available to social workers, care workers, firefighters, transport workers, occupational therapists and, since July 2003, a limited number of prison and probation service staff.

SHI is largely run by housing associations which can offer an equity loan or shared ownership to help key workers buy a house on the open market. It operates mainly in London and the south-eastern counties, plus Warwickshire in the West Midlands.

Its intentions may be good but SHI has run into difficulties. In June, two major housing associations warned it could actually make the housing crisis worse by boosting demand from low-paid workers without increasing the supply of properties.

Take-up has proved disappointing. By the end of July only 3,300 people had passed through the scheme and time is running out – it is due to wind up in March 2004 and be replaced by a targeted key worker programme. Deputy Prime Minister John Prescott announced the scheme last month.

“Key workers, including health workers and teachers, are critical to thriving, sustainable communities,” he told the Better Building Summit. “High house prices often drive them away from the neighbourhoods where they work undermining our frontline public services. We have listened carefully to what key workers and their employers have told us about their housing needs and aspirations and this new programme is built firmly upon the foundations laid by these views.”

Lack of interest in the current SHI scheme has been blamed on several factors. Many still prefer to buy their own property outright where possible rather than share ownership. The original maximum limit of £10,000 for equity loans has proved inadequate when set against spiralling house prices. The limit has since been raised to £30,000, reducing the numbers who can benefit.

Mike Rothman, senior financial consultant at Best Advice Financial Planning which has helped several hundred key workers find mortgages through the scheme, says lack of publicity has been its main downfall.

“The people we have dealt with have been delighted to get out of rented or parental accommodation and into their own property but they only heard about the scheme through word of mouth,” he says. “Housing associations are pushing for the scheme to be extended. I think that is essential because many more key workers could be helped.”

He rejects the argument that it has inflated the housing market, saying the market is crying out for first-time buyers – who currently take out just 29% of all new loans, compared with 38% last year and 48% five years ago, Datamonitor figures show.

Prescott launched a campaign to encourage greater SHI take-up in August. Then in October he announced a £5bn housing allocation over the next two years to drive forward the government&#39s commitment to affordable housing, key workers and decent homes.

This extension of SHI will also help key workers upgrade to family homes or find affordable rental accommodation in four ways. The first is Homebuy, an equity loan of at least 25% of property value up to a limit of £50,000. Next is the London Challenge Key Teacher Homebuy which offers higher value loans to some teachers in London. Third is intermediate renting – rents between social and open market rates. Finally there is shared ownership on new-build schemes where the key worker buys an equity stake from 25% upwards and pays rent on the balance.

Mortgage lenders have increasingly been doing their bit to help key workers and first-time buyers get on the housing ladder, with innovative products from Birmingham Midshires, Kent Reliance, The MarketPlace at Bradford & Bingley and Bank of Ireland. So can the industry succeed where the government is struggling?

In March, BM Solutions and The Mortgage Partnership launched a key worker home loan targeted at qualified teachers, nurses, firemen, policemen and health workers. This allows up to four applicants, one of whom doesn&#39t have to be a key worker, to pool resources and fund a joint mortgage. Applicants can borrow up to £250,000 with a maximum LTV of 90% and no redemption penalties. They pay Bank of England base rate plus 1.95% for the life of the loan and can borrow 2.5 x the joint income of up to four applicants.

“Rather than offering high income multiples to a single applicant, we can offer up to four applicants the possibility of pooling their resources enabling them to get on the ladder without over-stretching their finances,” says John Mawdsley, joint managing director of The Mortgage Partnership.

But David Bitner, head of product operations at the Marketplace, says the appeal of this deal is limited. “It does allow higher borrowings. Four people earning £20,000 could raise £200,000 in total but it seems dangerous to me,” he says. “It is hard enough sharing a rental flat with your mates,but buying together could leave you stuck financially if you fall out. The interest rate is expensive. I would hope to get my clients a better deal elsewhere.”

The MarketPlace, together with Mortgage Express, launched the Step Ladder shared equity appreciation mortgage in March, allowing first-time buyers to borrow 5 x income or 4 x income with no deposit. The deal allows them to borrow 100% of the property price but only pay interest on 70%. The remaining 30% is effectively an interest-free loan. In return the customer has to hand over a percentage of any property growth when they sell or remortgage, or after 10 years. If the price falls, the borrower is still liable for 100% of the debt.

Bitner says MarketPlace figures showed many buyers were dropping out because they couldn&#39t borrow 100% with decent income multiples. “We wanted something that allows them to do that safely without over-committing themselves while protecting the lender,” he says. “Customers give away some equity growth but they might still get something for nothing.”

Step Ladder wasn&#39t specifically targeted at key workers, Bitner says, but they could use it. “Key workers are an attractive market yet only a handful of schemes are actively geared towards it. Step Ladder will never sell bucketloads but will cater for some people. If you have a deposit and low income multiples you may be better off elsewhere.”

And Steve Jones, sales director for Towry Law Mortgages, admires the Step Ladder concept but is sceptical about its execution. “You sign away a lot of equity in return for quite a high interest rate,” he says.

Shared appreciation mortgages are dangerous, as Bank of Scotland and Barclays discovered when they used them for equity release.

“When the crunch came, many people resented giving away the equity growth in their property,” adds Jones. “It left them with a bad taste in the mouth. Repayment of equity growth on Step Ladder is complicated and many simply won&#39t understand it.”

Jones favours a more recent deal targeted at first-time buyers – the 1st Start mortgage from Bank of Ireland Mortgages, launched in October. Unlike other guarantor deals, it isn&#39t limited to graduates or professionals.

1st Start allows first-time buyers to borrow more by including their parents or close family members on the mortgage. The bank will lend up to 4 x parents&#39 income after deduction of any annual mortgage repayment, plus the child&#39s annual salary.

A child earning £20,000 could borrow 4 x income, or £80,000, on one of the bank&#39s standard deals. With 1st Start, if their parent earned, say, £30,000 (after mortgage repayments) they could borrow four times that sum plus the child&#39s £20,000 income, giving total borrowings of £140,000.

“This is a clever package that has been promoted as a first-time buyer mortgage but could equally apply to key workers. It can work particularly well for young doctors and nurses who are often following their parents&#39 footsteps. That means they have sufficient income to help out,” Jones says.

Bank of Ireland allows two names on the mortgage but the option of just one on the title deed. “This is a sophisticated extension of being a guarantor. Parents may not want their name on the title deed because they could face capital gains tax on what is likely to be their second property. But it could suit them for inheritance tax purposes by creating a debt against their estate. They need tax advice before making a decision.”

As with many innovative deals aimed at helping first-time buyers, 1st Start has been attacked by the press for encouraging reckless lending. “It has been attacked it for effectively offering high income multiples but that is unfair – this is actually a clever deal with safeguards,” Jones says.

David Hollingworth, mortgage specialist at London & Country Mortgages, shares Jones&#39 reservations about Step Ladder and his enthusiasm for 1st Start with one proviso. “The aim of a guarantor mortgage is that the child will eventually take over the house,&#39 he says. “Before signing clients up to 1st Start you must examine whether their income will grow sufficiently to release the parent from the mortgage.”

Leeds & Holbeck&#39s First Steps Guarantor Mortgage, launched in June, allows young professionals or graduates to borrow up to £250,000 with their family. The maximum lending amount is calculated on the guarantor&#39s income, who must meet their own financial commitments plus the applicant&#39s mortgage. The rate with 90% LTV is a fixed 3.99% until October 2005 then a fixed 4.99% until August 2008. Rates rise to 4.99% then 5.49% respectively and 95% LTV.

First Steps is targeted at graduates and could be used for police, firemen or teachers, many of whom will be graduates. “Before signing up, parents should understand their responsibilities as guarantor,” says Hollingworth. “Will they ever be released from this mortgage? If they want to trade up themselves, could they could get further lending?” Hollingworth is unimpressed by the deal saying it adds little to guarantor mortgages already on the market and that the rate, at 95% LTV, is high.

Scottish Widows Bank offers two guarantor mortgages that could help some key workers looking to stretch their borrowing limits – its Professional and Graduate mortgages. Parents only need to guarantee the part of the mortgage that the child cannot.

Scottish Widows Bank&#39s professional mortgage offers up to 110% of property value with no MIG. It defines the professions tightly, covering barristers, doctors and accountants but it does stretch to teachers. The graduate mortgage should cover a greater variety of people and offers up to 102% of property value. It currently charges 0.25% below base rate for the first six months, then 1.25% above for the remainder of the term.

“Scottish Widows Bank could attract those without a deposit but other niche first timer mortgages may suit key workers better,” Hollingworth says.

In September Kent Reliance building society launched the most narrowly-targeted key worker mortgage so far, aimed at paramedics, drivers, ancillary staff and officers working for the Kent Ambulance NHS Trust. Paramedics start on a salary of £11,000 rising to £22,000 after training, but the average two-bedroom flat in Kent costs around £150,000.

The deal takes into account future earnings potential when setting lending limits, examining pay scales and enhancements as a career progresses. Kent Reliance will also stretch income multiples to between 3.5 x and 4 x income, refund the valuation fee on applications and pay £150 cashback. It accepts business from brokers but doesn&#39t pay procuration fees.

Rob Proctor, head of lending at Kent Reliance, says the society is looking to roll out the scheme nationwide to all NHS trusts and to people such as teachers and police. Despite the best efforts of lenders, he says local key workers will always struggle to buy property. “Hopefully our mortgage, perhaps combined with a shared ownership scheme, will help,” he says. “We are examining other schemes but there are so only so many financial incentives you can give without making a loss.”

Rod Murdison, a London-based mortgage broker with Murdison & Browning, says lenders&#39 ability to offer innovative products to those on low incomes is limited by scare tactics in the press. “Critics suggest it is just as dangerous to lend more than 3 x income when interest rates are below 4% as when they are above 10%,” he says. “If you can get a deal for under 4%, why not the lend 6 x income, as the net monthly repayment is no greater?” This leaves many Londoners paying more in rent than they would for a mortgage despite a good record of debt repayment. “More lenders should use affordability criteria instead of income multiples. Unfortunately this usually baffles brokers, who tend to flood call centres with enquiries,” adds Murdison.

If lenders&#39 hands are tied, the government should do more. “Ministers should try something innovative such as restoring MIRAS for first-time buyers,” says Murdison. “They could limit it, say, to basic rate tax on the first £60,000 of the mortgage. Or they could empower local authorities to give financial help to local workers who want to buy a property.”

Other brokers point out that government targeting of key workers neglects other essential workers. Ray Boulger, senior technical manager at Charcol, says key workers is just a politically correct term. “The whole concept is questionable and the term too narrowly defined,” he says. “I can&#39t see how certain categories of workers are classified as key, but others – for example the transport workers that get them to work – are not.”

And Vijay Sharma, mortgage broker with Ashley Law in London, treats key workers the same as any other clients. “I key in details such as earnings, deposit, borrowings, whether they want flexible features, and fixed, capped or discounted rates, and I see what&#39s available,” he says. “I would check whether their profession gives them enhanced income multiples from any lenders, but that&#39s all.”

There is clearly only so much the mortgage industry can do to help key workers get on the housing ladder. The rest depends on Prescott.