Government expands Open Market HomeBuy, but what impact will it make?
Thursday, 03 Apr 2008 16:40
Shared equity scheme offered to help first-time buyers
Two year's after the launch of the Open Market HomeBuy scheme will a new government initiative change anything? Chris O'Toole investigates.
The aspirations of the first-time buyers in England received a welcome boost this week with the expansion of the government's flagship Open Market HomeBuy (OMHB) programme.
Originally launched in 2006, the OMHB is a shared equity scheme, partly financed by the government, designed to ensure would-be housebuyers are able to take their first step on the housing ladder.
However, the initial phase of the programme has largely been considered a failure - helping just 2,000 buyers into a home during its tenure.
In the eyes of homebuyers the products on offer through the OMHB were considered overly bureaucratic and inaccessible. There was also lack of awareness surrounding the scheme and potential borrowers were still
required to raise a deposit from their own resources.
In response chancellor Alistair Darling announced in last month's Budget the scheme was to be revamped to incorporate two new deals – MyChoiceHomeBuy and OwnHome – in an attempt to provide further assistance to the market.
Commenting on the scheme at the time Caroline Flint, housing and planning minister, said: "We have already helped more than 95,000 households onto the housing ladder since 1997 through our low-cost home ownership schemes. These new products will help us do even more."
Figures from the Council of Mortgage Lenders (CML) show first-time buyers typically paid 19.4 percent of their income as mortgage interest during 2007.
This represents the highest level since 1991, when it was 21.8 percent.
Meanwhile the typical income multiples for this group - the amount borrowed relative to income - hit a high of 3.32 times income last year, the highest level since the CML began collecting the data in 1974.
In response to these concerns the government has pledged to build two million new homes by 2016 - followed by a further one million, carbon neutral properties to follow by 2020 - with the aim of increasing supply and lowering average property prices.
However, these new homes could take a decade to influence the market and the OMHB scheme is an attempt to tackle affordability in the interim.
So what’s on offer?
Buyers opting for OMHB assistance must be able to finance 50-60 per cent of the cost of a property themselves, with a choice of two government schemes providing the remaining funds:
MyChoiceHomeBuy: Offered by Housing Associations (HA), acting as an equity loan provider in its own right.
- Borrowers may secure 15-50 per cent of the cost of a property.
- Repay a monthly interest charge, up to 1.75 a year, increasing inline
with the Retail Price Index (RPI) plus one per cent.
- No need for a deposit.
- Secure remaining finance through conventional mortgage with range of
lenders.
OwnHome: Offered by a partnership between Places for People, the property management and development group, and the Co-operative Bank.
- Borrowers may secure 20-40 per cent of the cost of a property.
- No repayments on equity for first five years.
- Interest is frozen for the first five years, rising to 1.75 per cent for years
six to ten, followed by fixed rate of 3.75 thereafter.
- No need for a deposit.
- Secure remaining finance through conventional mortgage with Co-
operative Bank.
John Barker, head of mortgages of Co-operative Bank, says: "The Co-operative Bank is fully supportive of widening access to home ownership and is delighted to have been chosen by the Housing Corporation to launch a joint equity loan scheme in conjunction with Places for People.
"By offering our full range of competitive mortgages for the new Ownhome scheme, we will help provide key workers and first time buyers with the essential financial support needed to take their first steps onto the property ladder."
Before April 1st Yorkshire Building Society had been offering the product, but was unceremoniously dumped under the programme’s revamp.
Principally the scheme is aimed at existing local authority tenants and key workers in specific geographical areas – but full criteria can be found here.
But will it be enough?
At first glance these schemes seem to represent an understanding of the issues facing first-time buyers, but on closer inspection they offer little in the way of concrete assistance.
While the changes were tentatively welcomed by FirstRungNow.com, the mortgage and property advice centre for first-time buyers, there were fears the OMHB scheme still lacked impact.
"On the face of it, properties should be more affordable with the new look of Open Market HomeBuy as the entry point is lower than previously," explains Helen Adams, managing director of FirstRungNow.
"However, our concern is that the equity loans will still be too narrowly available, probably only for key workers, those in housing need and in the south-east of the UK."
However, Labour still needs to be more decisive in the face of a growing crisis of affordability for first-time buyers.
Ms Adam adds: "We need to see more being done for other first-time buyers across the country.
"The government has continued to fail to help them out and we will probably need to wait for a pre-election tactic before we see any change here. First-time buyers will most likely need to consider co-ownership and co-financing as a possible route onto the property ladder."
The lack of new and suitable housing supply is the real elephant in the room here.
There simply are not enough properties arriving in the market, with the simple economics ensuring prices remain out of reach for many.
Furthermore, first-time buyers have been unable to secure the requisite private finance to match that of the OMHB scheme in the present market.
Following the credit crunch, lenders have been restricting their offering to high-risk groups – removing mortgage products and increasing interest rates on those left in the market.
This has occurred despite two cuts by the monetary policy committee (MPC) in the Bank of England's base rate – sending it down to 5.25per cent from 5.75 per cent in the last four months.
In the face of these market conditions the OMHB scheme appears to ineffectual, not tackling key financial or supply concerns.
"Equity share mortgages are a good option in principle, but they benefit so few borrowers that they are of absolutely no use for reigniting the stagnating mortgage market," argues Louise Cuming, head of mortgages at MoneySupermarket.com.
"The choice of products under this scheme remains limited and it can be difficult for customers to find a package that suits them. Should you be lucky enough to find a suitable product, you will be faced with a lengthy and complicated application process."
In order to increase the role of the products the application process and legal administration has to become more straightforward, argues the price comparison site, whereas the number of properties available under the scheme must also be extended.
Stamp duty is also one further concern for property buyers.
According to the New Homes Marketing Board (NHMB) the current threshold - which starts at one per cent above £125,000 and rises to three per cent over £250,000 – represents a regressive tax on those who can least afford it.
NHMB research finds stamp duty adds an average of £1,750 to the cost of a first property, with the figure increasing to some £7,500 in parts of the south-east and London – adding a further burden
Labour has come under attack for refusing to alter stamp duty thresholds – despite rising prices for the last decade continually increasing the revenue raised from the tax.
Concerns over deposits also remain, according to the Building Societies Association (BSA).
"We welcome the government's support to aspirant homeowners with the new schemes. However, our concerns over the Homebuy initiative remain," says BSA policy manager Neil Johnson.
"These focus on the difficulty of finding out about the products (with most aspirant buyers not likely to be current HA tenants) and they fail to reflect the problems that aspirant first time buyers have finding a deposit.
"Even if you are only buying 50 per cent of a property, saving for a deposit can present an insurmountable barrier to the majority of aspirant buyers, and a survey of societies last year confirmed this. Yet the changes will do nothing to overcome this problem."
So what does the future hold?
With moderation in house prices on the horizon the situation for first-time buyers could improve as they would now be able to afford lower priced homes. But prices have increased by around 150 per cent in the last decade alone, so any fall must be taken in context.
Given the present mortgage restricted mortgage market conditions, shortage of supply and burden of stamp duty whatever the government does in the current climate may prove ineffectual.