Deposit dilemmas

Property prices are dropping sharply, allowing first time buyers to fantasise about owning a home. But unless banks bring back lower-deposit mortgages, dreams will be crushed and the property market will remain a nightmare, says financial expert Robyn Stern

Mortgage lenders are currently offering products with interest rates below the 4% mark and these are set to drop even further. Well-priced tracker and fixed-rate lifetime products are being snapped up by those lucky enough to put down at least 25% deposit. Yet for the rest of us, mortgages are virtually non-existent, and those who do manage to get approval will find the interest rates are much higher, starting at 7% for offers with only a 10% deposit. This inconsistency, which penalises poorer customers by offering less competitive rates, has drawn criticism from industry stalwarts. David Bexon, Managing Director of SmartNewHomes.com, says: "Part of the deal of the government bailout was to see those banks benefitting from the £50 billion to return to 2007 lending levels, but this has yet to happen."

However, in an attempt to help first time buyers with the deposit dilemma, Housing Minister Margaret Beckett announced HomeBuy Direct in December. The £400 million deal gives buyers a five year interest-free equity loan worth up to 30% of the value of the property (15% from the government, 15% from the participating developer), payable as deposit. The loan offers fresh choice and opportunities for those without much capital, and 130 property developers are offering their units. The properties on offer through the scheme are limited to select new-builds in given locations, and are only available to those who qualify through their HomeBuy agent.

The government has also introduced two other schemes in a bid to help the first time buyer raise a deposit through an equity loan. MyChoice HomeBuy and Ownhome are available to those who earn an household income of less than £60,000, and who want to buy a house on the open market.

In addition to matching the government's 15% equity loan, some developers are shaving a further 5% to 25% off the property price to get buyers through the door. It is worth shopping around as developers' incentives are many and varied. To navigate the bewildering choice it is sensible to work out all your options on a spreadsheet with relevant facts under such headings as Location, Total Price, Deposit required, Deposit offered, Share-equity plan, and so on. This way you can readily compare the deals on offer and make an informed decision.

If you are buying directly from the previous homeowner you could ask for help with the deposit in the form of cash back on completion, instead of coming in with a lower offer. For example, an apartment at £200,000 would require a £50,000 deposit to take advantage of the lowest mortgage rates on offer. If you only had say, £25,000, you could ask the vendor to top up the difference, while still giving them the full asking price. In effect, they have taken £25,000 less but ensured the sale because it makes you financially viable. Where the house builder is providing 25% of the purchase price as an interest-free loan, mortgage lenders are prepared to advance the remaining 75% at very competitive interest rates.
While there are ways around finding a large deposit, if banks don't start offering better mortgages the housing market will not recover in the short term. At the same time, until the market does show signs of improvement banks will remain reluctant to offer better products in the fear that these mortgages will end up in negative equity. We're currently in a chicken and egg scenario that looks set to stay scrambled until the government intervenes.

HOMEBUY DIRECT

HomeBuy Direct, a new government scheme, is launching to give first time buyers that much needed deposit in a bid to nudge them on to the ladder. A selection of developers are to take part in the scheme, which will provide a five year, interest-free equity loan. We speak to John Slaughter, policy director for the Home Builders Federation, about the new deal.

Do you think the HomeBuy Direct scheme will help kick-start the market?
The HomeBuy Direct scheme alone will not kick-start the market. For that to happen, we will need to see the banks returning to more normal levels of mortgage lending, thus allowing people to realise their ambitions of home ownership, and we need to see government intervention to make this happen.

Who will the scheme help?
In the current climate the scheme is great news for home buyers and the house building industry alike. HBF worked closely with government to design HomeBuy Direct and the result is a workable product for both customer and seller that will assist to both deliver desperately needed affordable housing, and protect house building industry capacity - vital if we are to provide the houses we know this country will need in the future.

Do you think the limited choice of properties on HomeBuy Direct will be a turnoff for first time buyers?
More than 18,000 properties have been selected for inclusion in the scheme on sites in all areas of the country. This volume and spread gives first time buyers another option when considering purchasing a house, in addition to the many schemes and offers already being operated by individual developers.

Can any developer join the scheme?
Developers were invited to submit appropriate sites to the then Housing Corporation (now Homes and Communities Agency) last year. These were assessed and subsequently, 130 different developers were selected to be part of the scheme.

Can you still negotiate the price of your property with the developer?
Negotiations over price are unaffected. HomeBuy Direct is just a financial product that will be utilised once price is agreed, whatever that may be.