Firstbuy, I don't understand it

Flibsey

I am just wondering about the Firstbuy scheme. I don't know what they mean by the bit in bold...

Eligible applicants will be offered an equity loan of up to a maximum of 20% of the purchase price (based on the open market value). The registered provider will hold the second charge on the property. Applicants are required to fund at least 80% of the purchase price by means of a conventional mortgage, savings and any deposit where required. Applicants must obtain their conventional mortgage from a Qualified Lending Institution. For the first five years there is no fee charged on the equity loan component. At the start of year six a fee is collected of 1.75% of the market value of the property at the time the loan is entered into multiplied by the outstanding percentage under the equity loan, the annual fee of 1.75% will be uplifted by RPI +1% p.a. The equity loan is provided by the Homes and Communities Agency and developer as a second charge.

what does this mean in non jargon terms?
and is it possible to get a loan and a mortgage?

basically there's a house in our town, built by Persimmon. it's currently £136000 with firstbuy. we have no money for a deposit, but an amazing credit rating so were wondering if it's possible to get a personal loan for the deposit? or can you not do that?

thanks for any help!

mildred1978

Flibsey wrote: »

I am just wondering about the Firstbuy scheme. I don't know what they mean by the bit in bold...

Eligible applicants will be offered an equity loan of up to a maximum of 20% of the purchase price (based on the open market value). The registered provider will hold the second charge on the property. Applicants are required to fund at least 80% of the purchase price by means of a conventional mortgage, savings and any deposit where required. Applicants must obtain their conventional mortgage from a Qualified Lending Institution. For the first five years there is no fee charged on the equity loan component. At the start of year six a fee is collected of 1.75% of the market value of the property at the time the loan is entered into multiplied by the outstanding percentage under the equity loan, the annual fee of 1.75% will be uplifted by RPI +1% p.a. The equity loan is provided by the Homes and Communities Agency and developer as a second charge.

what does this mean in non jargon terms?
and is it possible to get a loan and a mortgage?

basically there's a house in our town, built by Persimmon. it's currently £136000 with firstbuy. we have no money for a deposit, but an amazing credit rating so were wondering if it's possible to get a personal loan for the deposit? or can you not do that?

thanks for any help!

It means that they will lend up to 20% as a deposit, and you don't pay any interest on that for the first 5 years. After the 5 years is up they will charge you 1.75% on the outstanding loan, and then increase that by RPI (a measure of inflation) plus 1% each year. So if inflation during year 6 and 7 were 5% your interest rate for year 7 would be 2.84% and for year 8 would be 3.98%. It gets more expensive every year basically.

You can never use a personal loan as a deposit. You'll be limited to certain mortgage providers and the rate is likely to be higher than ''normal mortgages, and you won't own any part of your home for 5 years or more (but you'll still be responsible for all of the maintenance).

I expect lenders will want to see evidence that you can save money as you'd presumably be looking for an 80% mortgage. They might actually demand you put in 5 or 10% yourself, depending on whether you get the full 20% via homebuy.

Flibsey

thankyou for your quick reply! right then. nope. we can't afford to buy lol.
:rotfl:was worth a look hahahaha!

princeofpounds

and is it possible to get a loan and a mortgage?

Normally no, but here yes because the approved banks, developers and govt have all agreed on this scheme. Just remember that it's as much to help out the banks and developers as it is you as a buyer, if not more!

The point is that the 20% should be your deposit, although the bank in question might not value the house at the same level so conceivably ask for even more deposit.

For the first five years there is no fee charged on the equity loan component. At the start of year six a fee is collected of 1.75% of the market value of the property at the time the loan is entered into multiplied by the outstanding percentage under the equity loan, the annual fee of 1.75% will be uplifted by RPI +1% p.a. The equity loan is provided by the Homes and Communities Agency and developer as a second charge.

Basically it is saying that the scheme participants are lending you a second mortgage which is subordinate to the one the bank is giving you (allowing the bank to see it as a deposit for the purpose of recovering their equity if things go wrong), but prior to any claim you have on the property should you get into financial distress (meaning you can still be in a type of negative equity right away if the value falls).

The part on the interest rate is not totally clear and unambiguous, but appears to be saying that for 5 years you pay no interest cost on the scheme loan. In year 6 you pay an amount equal to 1.75% of the loan. That amount increases by RPI inflation +1% in every subsequent year.

That is very cheap financing. the RPI+1% escalation would in theory mean that the price of the financing will become less cheap from year 7 onwards, and eventually expensive, but that will take a long time as the escalation is from a low base and slow. Plus you can presumably refinance and pay if off if you ever got a better deal elsewhere (unlikely though).

So where is the catch? Well, if you do get into negative equity in theory both the bank and the scheme have a block on your freedom to move or otherwise resolve the situation. Getting into negative equity is easier because unless you add in extra deposit you won't have any real equity.

The other catch is that when very favourable financing is available, that effectively puts more money in your pocket. Developers then can raise prices to 'share' some of that money. For instance if you have £10, and I say I'll give you another £10 but you can only buy this one house (identical to other £10 houses) from my mate with it, then you'll quite happily pay £19 for the house. That leaves you £1 better off, which is better than no benefit at all which would be the only alternative of not buying, but hardly the benefit that was 'advertised'.

This is why schemes like firstbuy, shared ownership and so on are often a vehicle for saving developers and not really for helping buyers. It's by a similar process that easing mortgage availability for buyers does not really help more buyers buy - it just helps push prices up.

Having said that, if you are confident any overvaluation of the property does not overwhelm the benefits of the cheap finance, and you can live with the negative equity scenario for some time, then Firstbuy isn't actually a bad deal as the money is genuinely cheap.

Flibsey

looking on the firstbuy site though, the price of this house is with a firstbuy 20% equity loan; according to the site the house is worth £170000 but they're selling it for £136000 IF you get the firstbuy; and we'd still need to get a mortgage for the rest of it and aparently at least a 10% deposit to get that mortgage AND solicitor's fees.... and it's just not possible for us. plus the fact, once we'd have the mortgage repayments plus fees, we'd never be able to afford it.

PLUS although it's a nice house in an ok area, it's so far from my daughter's school we'd either need to get a bus or change schools.

so back to the drawing board. we currently rent.

kiki*_2

Plus just to add another thought, they are pricing them so high to start with! We were told it would be a cheaper asking price if we didn't use the scheme!

poppysarah

Flibsey wrote: »

what does this mean in non jargon terms?

It means:

houses are too expensive, but rather than let the prices fall to affordable levels we will carry on propping up the market in this ridiculous way.

I hope the history books condemn the governments for inventing such scams.

poppysarah

kiki* wrote: »

Plus just to add another thought, they are pricing them so high to start with! We were told it would be a cheaper asking price if we didn't use the scheme!

If you could get evidence of that on tape I would LOVE a copy

kiki*_2

poppysarah wrote: »

If you could get evidence of that on tape I would LOVE a copy

Unfortunately at the time I wasn't quite so clues up and hadn't really realises what they were telling me otherwise I think I'd have got it in writing!

Instead I left them to look at older properties or 'second hand' properties as they liked to call them!

princeofpounds

Plus just to add another thought, they are pricing them so high to start with! We were told it would be a cheaper asking price if we didn't use the scheme!

Which exactly proves my point. It's as much a subsidy to private developers as it is to FTBs.

Flibsey

thanks everyone, this has been an eye opener!
there's a gorgeous second hand property spitting distance from my house, but we REALLY can't afford that. you never know. maybe ne day the bottom will fall from the market. until then, We'll continue with our council application (18-36 mth wait at our priority aparently) and continue living in a crumbling minghole belonging to someone else.