Help For First Time Buyers - Equity Loan

vicki488

Hi There Everyone!

Just after some guidence on the following:

A local house builder is offering the First Step Scheme where the first time buyer gets an 80% mortgage. This is ahieved by the buyer putting a 5% deposit down and the housebuilder providing a 15% loan. The home is then owned by the occupant 100%.

They are saying that the first 5 years is interest free but after that an intrest rate is applied. They also say that when you want to pay the amount back (I would be wanting to pay it back at the end of the 5 years to avoid any interest) you have to pay for someone to value your house and a solicitor to make sure all the house documents are transfered into your name. (I find this odd condering they claim the house is 100% owned by the occupant?) There is however no mention of what happens if the value of your house goes up or down? I assumed that at the end of the 5 years you simply had to pay back what they loaned you regardless of whether your house has increased or decreased in value? Is there more to this than meets the eye as if this was the case then surely a valuation would not be required. How much is a valuation?

I was looking for pro's and con's online but as I dont think this is technically an equity loan I can't seem to find any?

Thanks, any advice is appreciated.

Gary123456790

Sounds like you need to get more information as to exactly what this 'loan' is! It could possibly be a secured loan on the property, where they hold a 'charge' so if the house is sold, the loan gets redeemed, in effect a small extra mortgage.

Is the lender aware that the buyer doesnt actually have a 20% deposit?

It is a bit risky since any fall in value above 5% would mean negative equity. How would you pay back the extra loan in 5 years time, and would you stay there forever or want to move in the future?

Gary.

Thrugelmir

Is this the FirstBuy scheme where the Government assists?

vicki488

I think it is a joint thing between the house builder and the governement. The house is big enough for us to stay in very long term. We would be buying it to live in permanently not to sell on so the negative equity thing isnt too much of a worry. Our 5% plus 15% off the home builder is classed as a 20% deposit. We will be able to save the 15% loan amount within the first 5 years and pay it off prior to incurring any interest from the builders. The mortgage companies are aware of where the deposit is coming from.

kingstreet

This is a shared equity scheme.

You buy the whole of the property with a mortgage, a deposit and a second charge from builder or government.

The second charge is interest-free for five years, with interest being payable from the start of year six.

The loan is repayable on the sale of the property and will be whatever percentage of the price was agreed at the outset. ie a 20% second charge will be repaid with 20% of the sale proceeds at the point of sale.

This is normally based on the sale price, regardless of whether the price has increased or decreased, although it may be worth checking there isn't a drop lock in case of a price reduction. This would mean 20% or £x, whichever is the higher.

The major concern with such schemes is one of future uncertainty. What happens if you can't sell or can't remortgage when the second charge is about to start charging interest? Will you be able to afford the extra payments which will be required?

MARKMAKAVELI

I'm no expert but it seems that any scheme that is put out to help people on the ladder usually means vastly overpriced property in the first place.

I know you mentioned you see it as long term but just thought it worth noting this.

vicki488

Thanks guys. We will be seeing an advisor prior to getting any kind of mortgage. The houses are not over priced as the estate is being built to provide more affordable housing to local people. They have a few options available so we will be carefully looking into them all. We would be able to save the amount of money required for the 5 years. It says that u can pay lump sums off the loan within the first 5 years and no interest or penalties will be added for doing that.

Thrugelmir

vicki488 wrote: »

. We would be able to save the amount of money required for the 5 years.

Do your sums carefully. 60 months will fly by and you need to allow for contingency spending. In case of an unexpected event.