That growth is likely to be supported by the second phase of the Government’s Help to Buy scheme, which enables people to buy a home worth up to £600,000 with just a five per cent deposit. More than 2,300 Help to Buy mortgage applications were accepted in October - Phase Two’s first month.
The scheme works fine for households with a reasonable income but short on savings. However, for lower income groups, including many London first-time buyers, Help to Buy isn’t really helping because while it makes the deposit more affordable, borrowers pay interest on a larger loan, which sharply raises monthly repayments.
Savills found that although Help to Buy could support 400,000 transactions over its three-year lifespan, nationwide, many households with average incomes below £45,000 will effectively be excluded because they cannot manage the repayments. In London, the average income of an “excluded” household rises to £55,000.
With a 95 per cent Help to Buy mortgage, the deposit they need will be slashed from an average £63,000 to less than £13,000, but monthly repayments would rise to a probably unsustainable 32 per cent of income.
“The new excluded are unlikely to qualify for social housing, yet their incomes are not high enough to take advantage of the market recovery [or Help to Buy],” says research director Susan Emmett.
So what are the options for London first-time buyers on smaller incomes? And which would work best for them?
Help to buy + equity loan + high street lender
Phase one of Help to Buy, introduced last April, could help new-build buyers. They need a five per cent deposit, and the balance is made up of an equity loan of up to 20 per cent from the Government or the developer, plus a 75 per cent mortgage from a high street lender.
The equity loan is interest-free for the first five years. In the sixth year a fee of 1.5 per cent is payable, rising in subsequent years in line with the retail prices index - currently 1.9 per cent - plus one per cent. You can pay back some or all of the loan early.
Affinity Sutton housing association offers two equity loan options, depending on whether you take the loan from the Government or from Affinity Sutton itself. Sales director Yvette Ruggins said Help to Buy’s popularity is seen at the association’s development The Arcus near Horsham, West Sussex. “All 14 homes were reserved within a month of its launch, 11 through Help to Buy.” But Tim Seward, sales director at Centra Living, part of Circle Housing Group, points out: “You still need five per cent of the full value of the property to qualify for Help to Buy.”
Success story: The Arcus near Horsham, West Sussex, where 14 Affinity Sutton housing association flats were snapped up, mainly through the Government’s low-deposit Help to Buy scheme
For London households on less than £66,000 a year, shared ownership could be more workable. Buyers take out a mortgage for a share worth between 25 per cent and 75 per cent of the property’s market value, and pay a relatively low rent on the balance.
Seward adds: “With lenders offering 95 per cent loan to value mortgages, buyers only need a five per cent deposit, so that could be just five per cent of the 25 per cent minimum share.”
Over time, shared owners can buy a bigger share of their home, a process known as staircasing. They pay current market value, so if property prices are rising, they will pay more for new shares than they did for the original share. Typically, additional purchases must be in increments of at least 10 per cent of the property value, but they could buy the whole balance in one go.
Shared-ownership purchases are always on a leasehold basis, and the lease will outline any charges involved. Buyers of additional shares pay for the valuation and their own costs in the transaction, such as legal and remortgaging expenses.
However, research by Thames Valley Housing found that although many aspire to increase their holdings and eventually own the property outright, only three per cent manage to staircase each year.
To help, the association has introduced Shared Ownership Plus, which allows shared owners to increase their holdings gradually and cost-effectively, initially by one per cent a year, spreading the cost over 12 months. The plan is being tested at Thames’s Brook Wood development in Horley, Surrey.
Selling shared ownership
“If a shared owner wishes to sell their share, most leases state the housing association can charge one per cent of the value of the share if it finds a buyer, which is considerably cheaper than a typical estate agent fee of 1.5 per cent to two per cent,” says Seward. Shared owners who have acquired 100 per cent of their home can sell it themselves, though the housing association has first refusal on the purchase.
Research into Help to Buy published by the Resolution Foundation think tank concludes that expanding shared ownership would be the best answer for lower-income first-time buyer households. It says the system “acts as a bridge between renting and owning, offering modest-income households a route to home ownership that is more affordable and much lower-risk than a conventional mortgage.”
But demand is very high. “For many Londoners, particularly younger families and professionals, it is the only way to get on the housing ladder,” says Lisa Iley, senior sales manager at Network Living, which is selling 21 shared-ownership flats in its Aspire development above Aldgate East Tube station.