First-time buyers in England could get a home for up to half price after the Government launched a new affordable housing scheme.
The scheme is known as First Homes, and the first properties built under it went on the market in the East Midlands market town of Bolsover today.
With house prices having surged by nearly 11 per cent in the past year, property experts say there could be an influx of demand for the homes.
On the ladder: A new Government scheme, First Homes, could help buyers in England to purchase their first property by offering a discount of up to 50%
However, research by estate agent Savills has suggested that buying a typical two-bed flat under the scheme would still be unaffordable for 88 per cent of households in the capital, and 68 per cent in some areas of the South East.
The properties are built and marketed by house builders in the same way as any other new build, but must be sold with at least a 30 per cent discount on their market value.
If local councils approve it, that discount could be increased to 50 per cent.
This will allow buyers to get on to the housing ladder with a significantly lower deposit, or to get a bigger property for their money.
‘There’s likely to be a scramble for properties under this scheme as they become available,’ said Tim Bannister, director of property data at Rightmove.
‘The scheme could help some people bring their plans forward or buy a bigger home than they were originally expecting to. Eligible buyers will need to get in quick to have the best chance of securing one.’
According to the Government, 1,500 more First Homes will be put on the market this year, and then at least 10,000 per year or more ‘in the years ahead’.
However, property experts have raised some concerns about the scheme – including that it might be hard for those who use it to climb the property ladder because they will need to sell their First Home on at a discount.
Where can I get a mortgage?
Lloyds and Nationwide Building Society, two of the UK’s largest mortgage lenders, have already said they will offer ‘high loan-to-value’ mortgages against First Homes.
Newcastle Building Society has also confirmed that it will lend on the homes.
In theory, First Homes could be used alongside the Government’s mortgage guarantee scheme, which used Government backing to encourage lenders to offer mortgages with 5 per cent deposits to first-time buyers.
Who qualifies for a First Home?
As the name suggests, the purchasers of First Homes will need to be first-time buyers. If you are buying as a couple or other group, this applies to everyone.
The annual household income should not be more than £80,000, or £90,000 in Greater London.
There is a value cap on the homes, too: the most expensive properties available under First Homes will be £420,000 in London and £250,000 in the rest of England.
Applicants will usually need to live, work or have another connection, such as family members, in the area where they want to buy their home.
There might also be extra criteria depending on where they live, because local councils are allowed to apply additional rules in their areas.
For example, they might lower the maximum household income, or give priority to key workers.
If they lower the maximum income, though, they will need to keep it at a level where buyers would still be likely to be approved for a 95 per cent mortgage.
Who can afford a First Home?
Some say that First Homes will still be unaffordable to people on average incomes, especially in high-value areas such as London.
‘The average house price in London is now over £500,000 according to the Land Registry,’ says Olivia Harris, chief executive of affordable housing provider Dolphin Living.
‘A First Home with a 30 per cent discount will, therefore, cost around £350,000 – which is not affordable to a London median earner, defined by HMRC in 2018 as being on £26,300.
‘It would possibly be affordable to a dual-income household, but they’d need a deposit of at least £35,000, which puts this out of the reach of many.’
Estate agent Savills has crunched the numbers on First Homes.
Out of reach? Data from Savills shows a two-bed flat could still be unaffordable for those in London and the South East, even if they used First Homes
It calculated that, if a buyer needed a 15 per cent deposit and could get a mortgage for four times their salary, they would need an income of £34,125 to buy a typical 700 sq ft, two-bedroom flat using First Homes.
This is affordable to 53 per cent of households, it said, compared to just 36 per cent of households which could afford the same property at open market value.
In Bolsover, the location of the initial pilot scheme, this same property would be affordable to to 59 per cent of households.
But in more expensive St Albans, Savills calculated that only 22 per cent of local households could afford to buy a 700 sq ft property with a 30 per cent discount, and in London, just 12 per cent.
Emily Williams, residential research analyst at Savills, says: ‘[First Homes] should open up home ownership to less affluent households than Help to Buy, particularly in the Midlands and the North.’
‘But in parts of the South, the ability to deliver family housing that is affordable to middle and lower incomes households will be limited.’
The homes will be built across England and the Government says 1,500 will be for sale in 2021
There are also 18 local authorities where the average two-bed, 700 sq ft flat, with a 30 per cent discount, would still cost more than the £420,000 (London) or £250,000 (rest of England) price cap.
A 40 per cent discount would be needed in 14 areas including Elmbridge, Windsor & Maidenhead, Islington, Hackney and Cambridge, according to Savills, while in Kensington & Chelsea, the City of Westminster and the City of London, even a 50 per cent discount would potentially be insufficient.
For a 900 sq ft, three bedroom family house, the number of locations theoretically needing a discount of more than 30 per cent rises from 18 to 58, including Wokingham, Wycombe and Winchester. In eight of these, a 50 per cent discount would be insufficient.
Stepping up could be a struggle
When buyers want to move on, their property will remain as a First Home.
This is a key difference to Help to Buy, where buyers have access to all of the equity in their home once they have paid back the Government.
It means buyers must sell their home at the same percentage discount that they bought it with, to another eligible buyer.
Some property experts say this could make it difficult for First Home buyers to move up the housing ladder.
Some say buyers could struggle to size up to a larger, family home because they will need to sell their First Home on to a similar buyer at the same discount they bought it with
‘The issue comes when the First Home buyer seeks to move to their next home and take a step up the property ladder,’ says Anthony Codling, chief executive of property data platform Twindig.
‘If they purchased their home with a 30 per cent discount, when they come to sell they will only receive 70 per cent of the sale proceeds.
‘Unless they can buy their next home with a similar discount, how will they be able to afford the market price?’
This is a similar issue experienced by those who have used other Government-backed schemes such as shared ownership.
‘I think the restrictions put on them will cause a lot of people issues when trying to buy their second home,’ says James McGregor, director of financial advisor and mortgage broker Mesa Financial. ‘It doesn’t really put people in a free market, very much like the shared ownership scheme.
‘The Government are essentially capping the price, which means it’s going to be very hard for people to take the second jump once they are in one of these schemes.’
This could mean that people have to stay in their First Homes for longer, which might be a problem if, for example, they decide to start a family.
‘I think people who use First Homes will be likely to stay in their first home for longer, while they move up in income and hopefully get together a bigger deposit,’ said Stuart Law, chief executive of peer-to-peer property lender Assetz Group.
However, this may not matter if they use the scheme to buy a first home that is bigger than what they could otherwise have afforded.
‘If the scheme is as described, it will be fantastic for buyers as they will be able to get a bigger, better house for their money,’ Law continued.
If you try to sell your property for at least six months, but can’t find a First Homes-qualifying buyer – even after local restrictions have been removed – you may then sell the home on the open market.
However, you will need to pay the council for the ‘loss of an affordable housing unit’. This could mean repaying the discount you initially received, or paying them a set percentage of the purchase price.
Law does not think this will be an issue. ‘A property that is discounted is going to attract enormous numbers of potential buyers and make the property far more marketable,’ he says.
The homes will be classed as affordable housing, and count towards developers’ quotas which are agreed with the council when they get planning permission.
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