During the Budget speech of March 23, 2011, Chancellor George Osborne outlined a new scheme designed to give the UK housing market a boost by helping first time buyers. Known as FirstBuy, this initiative will give some people access to shared equity deposits to make getting on the property ladder more affordable. How will this work and who will benefit?
Government Allocates £250m to Help First Time Buyers
FirstBuy has been given a £250 million budget which will be funded by a levy on UK banks and supported by housebuilders. It has been created to help some people buy a new build property on a first time mortgage basis. The aim is to reduce unaffordable deposit costs via a shared equity loan scheme that could allow a buyer to put down just 5% to get a 75% LTV (loan to value) deal. The scheme is currently set to last for one year.
How Will FirstBuy Work?
A buyer will need to contribute 5% of the property value. This deposit will be increased to 25% by additional loans from the government (10%) and the housebuilder (10%). This allows buyers to put down a lower than average deposit and may also help them get better interest rates as they will qualify for a 75% LTV mortgage. This shared equity loan will need to be repaid over time. At this stage borrowing will be given on an interest free basis for the first five years. In the sixth year, interest will be charged at 1.75%. From that point, it will default to inflation + 1%.
Why is the UK Government Helping First Time Home Buyers?
During the course of the recession, the government has made calls for lenders to offer additional help to people who cannot get on to the housing ladder. This has led to some lender initiatives such as the pilot of the Lloyds TSB Local Lend a Hand scheme which started in March 2011. FirstBuy puts state backing behind the need to boost first time mortgage sales.
According to the Budget 2011 report of March 23, 2011, this will help 10,000 first time buyers purchase a new-build home. It could also help rejuvenate the housing market which is partly dependent on new entrant activity. At the moment, many people cannot afford a large enough deposit to buy for the first time. A boost could have a positive impact on the market as a whole and could help the housebuilding sector at the same time.
FirstBuy is not without its critics, however. A BBC Online report on the scheme on March 23, 2011 outlined concerns from the Council of Mortgage Lenders (CML) that this was not enough help compared to the HomeBuy Direct initiative set up by the previous Labour administration. The report also quotes Toby Ryland from Blick Rothenberg who raised the concern that giving loans to make deposits more affordable could "encourage first-time buyers to purchase property with very high loan-to-value ratios".
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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