The equity mortgage arm of the government’s Help to Buy scheme has attracted much media attention since its introduction – it has been lauded for breathing new life into the housing market by some, whilst others have warned that it is creating a housing bubble.
As providers of new build housing can still register to participate in the Help to Buy scheme, is it time that your organisation asked itself how it could benefit?
How does it work?
There are two parts of Help to Buy – the first being an equity mortgage product and the second a mortgage guarantee scheme. Under the equity mortgage product a first time buyer can acquire a property up to the value of £600,000 from a house provider participating in the scheme. The buyer receives a government loan of between 10 – 20% of the value of the property and pays a deposit as a low as 5% of the value of the property.
The equity mortgage is a second mortgage which sits behind a conventional mortgage from a traditional lender. The equity mortgage lasts for a term of 25 years and is repayable on sale of the property and certain other events. The amount repayable under the equity mortgage is based on the value of the property and the percentage of the loan at the point of redemption. For example if the owner sells the property for £200,000 and it was subject to a 20% equity mortgage then the government would be repaid £40,000.
No interest is payable on the equity mortgage for the first five years which favours comparably to shared ownership where rent is payable on the retained proportion from day one. When interest does become payable it is calculated to a strict formula and increases are tied to RPI plus 1%.
Who benefits?
Help to Buy has become a vital tool to the government in stimulating the provision of new homes for first time buyers – in the first 15 months of Help to Buy, which launched in April 2013, there were 27,167 completions. Some of the largest house builders have participated in the scheme since its inception and it has proved to be a success. Bovis chief executive David Ritchie is quoted as stating that Help to Buy accounted for around 30 per cent of sales, calling it “an important part of the sustainability of the market”. The product not only accounts for a significant proportion of sales for large builders such as Taylor Wimpey and Persimmon but has also been embraced by much smaller providers who see it as a key factor in their financial planning and viability going forwards.
The scheme seems to be succeeding in its aim to help first-time buyers – statistics have shown that since Help to Buy started the average income of a first-time buyer has reduced from £39,000 a year to £31,000. The typical age of buyers is also stated to be coming down from 38/37 to 30/31.
Can it work for you?
Earlier this year the government announced that the scheme would run until 2020 to fund up to 120,000 new homes and it continues to take registrations from new providers who wish to offer Help to Buy. Whilst there are some eligibility requirements all types of house builder may apply and there is no minimum number of units requirement.
Whilst a provider of Help to Buy will need to fulfil various obligations in respect of the marketing and sale of the units and adapt its conveyancing procedures, the scheme is run and administered by HomeBuy Agents appointed by government so the existence of the equity mortgage does not create an residual administrative burden.
Organisations that are charitable will need to consider whether participation in the Help to Buy scheme is a charitable activity and that the individuals being housed have identifiable housing needs that Help to Buy can alleviate. Please contact us if you need more information on this as each organisation is different.
One step further
Many providers have created their own equity mortgage products where they act as both the seller and also provide the loan under the equity mortgage. Whilst this is funded by the provider itself and they take on the risk of any reduction in the value of the property, they will get the benefit of any uplift in the value of the property between sale and redemption of the mortgage. As the provider is running the product itself it will also have more flexibility in respect of the terms of the mortgage, beneficiaries and the amount lent.
We are able to assist with all aspects of the equity mortgage Help to Buy product, from registration with Homes and Communities Agency, advice on the obligations under the funding documentation through to providing training, procedures and conveyancing guides on the scheme. We can also assist with the provision of bespoke equity mortgage products where your organisation provides the equity loan itself.
For further information on this article please contact Nicki Winstanley, Chief Executive on nwinstanley@hylandlegal.uk or on 0161 312 3400
(c) Hyland Legal 29 August 2014
This article has been provided for your general interest and information only. It is not legal advice and should not be acted on or relied upon in any way. It does not create a solicitor client relationship between Hyland Legal and any other person. Appropriate legal advice should be taken before applying any information in this document to any facts and circumstances, before taking or refraining from legal action or before taking a decision on any issue.