First-time buyers: Is equity share fair?

By Andrea Watson
Posted: 2010/05/28

PARDON me for being confused about equity share schemes but it seems I am not alone.

Ever since the last government introduced them, loans to buy property have changed their name and nature with every passing season.

Ostensibly designed to help key workers and first-time buyers, many admit equity share schemes are really a means of helping "struggling" developers.

"HomeBuy Direct seems to be a kneejerk reaction to the recession to help developers sell on properties that were being left empty because of the downturn, " said Sarah Garrett, editor of First Time Buyer magazine.

Under HomeBuy Direct, the Government and builder underwrite five-year interest-free loans worth up to 30 per cent of the value of a new-build property for eligible applicants.

This shared equity loan can no longer be used as a deposit.

There are other schemes, too, such as the London Wide Initiative and First Time Buyers Initiative and some private developers offer their own versions but a number of people do not think equity share is such a good idea.

James Moss, director of Curzon Investment, said: "Properties on offer range from good value to abject rip-off, with some developments ramping up the sales price.

Consumers putting in a small amount of equity may not realise this and overpay."

To help people decide for themselves the Daily Express put four key questions to developers and other housing experts.

Will equity share schemes be phased out?
Matthew Harrison, deputy chief executive of Plumlife, a HomeBuy agent: "Labour committed to funding HomeBuy Direct until 2012 and we expect that to be honoured by the new leadership. What happens after that isn't certain but cuts are anticipated."

die Fox, director, affordable homes specialist Stagnell Fox: "The Conservatives' manifesto states they want to 'strengthen shared ownership schemes which allow those on low to middle incomes to own or part-own their home'.

"They also say they 'will offer tenants with a record of five years' good behaviour a 10 per cent equity share in their social rented property, which can be cashed in when they want to move up the housing ladder'."

Brian Murphy, of Mortgage Advice Bureau: "It's unlikely that shared equity schemes will be phased out. They are an effective way for people on lower incomes to make that first step on to the property ladder."

Ray Boulger, manager, John Charcol mortgage brokers: "The Government set aside £300million to fund HomeBuy Direct, which is peanuts. It won't make up for the drying-up of mortgage finance from lenders."

Sarah Garrett: "This government said it wanted to simplify the HomeBuy products offered to first-time buyers. I would hope the many different products that offer an equity loan will be streamlined. For first-time buyers it's extremely confusing."

Sue Warwick, head of sales at Miller Homes: "All good things must come to an end and in our view the clock is ticking.

The truth is that we don't know if or when shared equity will cease to receive government funding. We can safely assume the axe will fall pretty much everywhere in public spending, possibly removing HomeBuy Direct in one fell swoop."

Does the mortgage industry like equity share products?
Matthew Harrison: "There are plenty of lenders out there offering mortgages to HomeBuy Direct buyers, so it's a case of researching which are the most competitive deals. At Plumlife we help people navigate their way through the options."

Adie Fox: "Generally the mortgage industry is happy to provide for shared equity purchasers. Each mortgage provider is protected if they do fail to make payments."

James Moss: "Many mortgage companies won't lend as they view buyers as sub-prime.

People looking at shared equity cannot by definition afford to buy a house."

Sarah Garrett: "Only a handful of lenders are willing to offer HomeBuy Direct mortgages, including Halifax and Woolwich. Lenders also now expect the buyer to invest a small amount into their property. You would usually need to put in a minimum deposit of five per cent of the mortgage. We recommend the website www.spfsherwins.co.uk, a specialist mortgage broker."

Brian Murphy: "Drawbacks to equity share are that not all lenders offer mortgages like this and the rates available won't be the best on offer for people with large deposits."

Ray Boulger: "Only a limited number of lenders offer HomeBuy mortgages and several don't let you use their standard mortgage range."

What are the alternatives to HomeBuy Direct for FTBers?
Matthew Harrison: "Another government scheme is Rent To HomeBuy, which allows aspiring buyers to 'try before they buy' for up to five years at a substantially discounted rent - usually about 20 per cent lower than market valuations. The idea is that this helps you save up for a deposit to buy."
Adie Fox: "We suggest Try Before You Buy, Intermediate Rent and equity loan schemes.

For information visit our website, www.stagnellfox.co.uk."

Sue Warwick: "Start saving now and stay committed to saving. First-time buyers should also speak to new homes developers.

We still have limited MiWay funding (our own shared equity scheme) and this is not dependent on government money."

Sarah Garrett: "For first-time buyers with a minimal deposit there's New Build HomeBuy (part rent, part buy) which is also available on new-build properties, often in big cities."

What advantages/disadvantages are there to equity share purchases?
Sarah Garrett: "The worst thing the last government did for equity loan products was to stop allocating funding which allowed first-time buyers the chance to purchase any property on the market, not only selected new-builds, as with HomeBuy Direct. Other disadvantages are that if the property goes up in price, then the amount of the loan will also increase, in line with the percentage of the original property price that was borrowed. If the property price goes down, with many products the loan will remain the same as that originally borrowed."

Sue Warwick: "It is hard to see a disadvantage. You get the home you want now at a price you can afford.

You have up to 25 years to pay pack the deposit (unless you move in the meantime) and you get access to some very competitive mortgage rates."
James Moss: "HomeBuy schemes are a failure.

Labour's targets on home ownership were a great aspiration but in reality renting has gone up 50 per cent. The biggest investment is from buy-to-let investors, not the Government.

The middle classes have been funding the housing expansion which is why we are currently at a standstill."

Child care officer Catherine Emesih, (below with her two-year-old daughter Demelza), bought her three-bed home in Liberty Park, Coventry, with the help of the HomeBuy Direct scheme offered by Wates Living Space.

Liberty Park: 0845 676 0160/www.libertyparkcoventry.co.uk