Homebuy and falling prices

minimoocow

A couple of friends/family have recently bought via the Homebuy scheme where the government puts up a loan of 17.5% of the purchase price with no interest payable.

My query is - what happens if prices fall? Is it still 17.5% of the purchase price they'd need to pay back or 17.5% of the valuation. On online newspaper article suggests that the government takes the risk for the 1st 17.5% which would mean they could pay nothing back - is that correct?

If so they may be able to buy more of the property sooner than they thought given the way the surveyors are doing valuations atm!

Do any of you know the answer?

Thanks

MMC

luckyfool

No, they need to pay back 17.5% of the valuation when they buy the government out. The government takes 17.5% of the risk, they don't eat the first 17.5% of any fall in value . . . unfortunately! What you might mean is that there will be a mortgagee protection clause in place which effectively guarantees that the mortgage lender gets their money back first from any sale proceeds, and that the governments charge comes behind the mortgage lender in terms of priority. e.g. Market value £200k Lets say they buy 150k of it, and the government owns 50k (25%). Mortgage is taken out for £150k with Halifax. 1 year later prices have fallen 10% and its sold for £180k. Basically of the £180k proceeds, Halifax get the first £150k, then there is £30k left over. But the governments share (25% of 180k) should be £45,000. Basically what happens here is they get the £30k, and the previous owner will owe the Government £15k. Of course if it had gone up in value by 10% then the owner would make £15k and the government would make £5k.

luckyfool

No, they need to pay back 17.5% of the valuation when they buy the government out. The government takes 17.5% of the risk, they don't eat the first 17.5% of any fall in value . . . unfortunately! What you might mean is that there will be a mortgagee protection clause in place which effectively guarantees that the mortgage lender gets their money back first from any sale proceeds, and that the governments charge comes behind the mortgage lender in terms of priority. e.g. Market value £200k Lets say they buy 150k of it, and the government owns 50k (25%). Mortgage is taken out for £150k with Halifax. 1 year later prices have fallen 10% and its sold for £180k. Basically of the £180k proceeds, Halifax get the first £150k, then there is £30k left over. But the governments share (25% of 180k) should be £45,000. Basically what happens here is they get the £30k, and the previous owner will owe the Government £15k. Of course if it had gone up in value by 10% then the owner would make £15k and the government would make £5k.

minimoocow

Thanks Lucky Fool - that does make sense.

The article I was referring to was here:

http://www.guardian.co.uk/money/2007/dec/02/mortgages.cash

"The scheme also offers some protection against falling house prices: if the value of a property drops, the government will absorb the first 17.5 per cent of any loss."

When I initially read it I took it to mean that the loan wouldn't need to be paid back but I think you are right in your thinking (was wondering how Mr Brown would justify underwriting 17.5% with taxpayers money but stranger things have happened!)

I think looking at it it probably isn't the opportunity I first thought it might be.

i.e.
Purchase price £200k
Gov Loan £35k
Mortgage £165k


Prices fall say 20%

Value £160k
Gov loan £28k
Mortgage £165k less repayments

So not enough equity to buy gov share out anyway even if it is cheaper . . .

Thanks again!

MMC