Ask Eddie

Ask Eddie

9 June 2007

With the news that the average home in England and Wales now costs £180,000 – £15,000 more than a year ago – first-time buyers (FTBs) are becoming increasingly desperate to get a hold on the housing ladder. What options are now available to them and what are the specific legal pitfalls they should look out for?

Eddie says: Today’s housing market is tough for those who want to take their first step onto the property ladder. Brokers can help by making them aware of their options.

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In recent years, the measures that FTBs are taking as a means of buying a property are, by necessity, more diverse than ever before. In response to the rise in house prices, loans are offered over much greater periods of time, the amounts borrowed have gone up and many FTBs are increasingly dependent on parents for loans, gifts and even to act as guarantors of the loan for their property.

However, these options do not appeal to all FTBs, and some opt for a different route. Co-buying and the government’s HomeBuy scheme are just two examples of the alternative options available to them.

Co-buying

Many young people are now considering teaming up with friends, relatives and, in some cases, complete strangers in order to buy their first property. Websites are even springing up which act as a kind of dating agency for potential co-buyers, such as www.buyingtogether.org.uk.

Although an ideal option for some, this can be a complicated process so it’s important that buyers set down the legalities of an agreement. The following check list provides a good starting point for what should be agreed and detailed in a contract:

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• The amount of money contributed by each party to the deposit.
• The conditions of future sale, including the stipulation of how much time should pass before either party can seriously broach the subject of the sale of the property.
• How big a stake each person owns in the property.
• The systems/policies that should be set up by each individual to cover the mortgage in the event of either party having financial difficulties.
• Agreement on the use of the property – for example, is it being bought for habitation solely by the co-buyers, as a rental property or is this flexible?
• Clauses regarding what will happen in the event of illness/death of one of the parties involved. This also means that both parties would have to make a will, disclosing some of its contents to their co-buyer.

Government schemes

Recognising the difficulties many face in getting onto the property ladder, the government now offers three HomeBuy products specifically for FTBs – Open Market HomeBuy, Social HomeBuy and New Build HomeBuy. All three are based on equity sharing and offer people a choice in the type of home they can buy. The key to the success of these schemes for the individual is to make sure they are aware of exactly how each option works and then decide which, if any, would be most beneficial to them.

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• Open Market HomeBuy

To qualify for the Open Market HomeBuy product, the buyer needs to raise finance to purchase around 75 per cent of a property on the open market. This scheme sees the government and selected lenders each funding up to 12.5 per cent of the cost of the property.

Although this scheme has been devised with key workers in mind, particularly those working in the East, South East and London, it is also available to other FTBs and those in council houses, housing associations or on waiting lists for this type of accommodation.

• Social HomeBuy

Housing association and local authority tenants who do not have the right-to-buy, right to acquire or cannot afford either scheme, can buy a minimum initial share of 25 per cent in their rented home with a pro-rata discount of up to £16,000. The remainder of the equity is then retained by the landlord who can levy a charge of no more than 3 per cent of the capital value of their retained equity onto the tenant. Tenants are allowed to buy 100 per cent equity at a discount if they can afford to do so.

• New Build HomeBuy

Similar to the Social HomeBuy – minimum equity share of 25 per cent and a levy charged on the landlord’s retained equity – New Build HomeBuy is specifically designed for new build property. The buyer has the opportunity to buy further shares in their home at market value if they can afford to do so later – a process known as ‘staircasing’.

Whereas Social HomeBuy tenants would initially approach their social landlord for details of the scheme, HomeBuy agents would be the first port of call for those interested in the New Build HomeBuy and the Open Market products. The FTB initiative, which uses public sector land to provide affordable housing, is just one form of the New Build HomeBuy scheme.

Buying a property for the first time can be a daunting prospect, but by offering knowledgeable guidance at an early stage in the process, mortgage intermediaries can significantly help first timers to take that crucial first step onto the property ladder while avoiding the pitfalls as they go.

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