Your First Home Scheme – what you need to know

What has the Government announced?

The Government’s proposed Your First Home Scheme has an attractive headline: eligible first time buyers in England could purchase a new build home with only a 2.5% deposit, supported by a Government-backed equity loan of up to 20% and a conventional mortgage for the remaining amount, within an initial interest free period. 

It is also currently expected that the scheme will be limited by local price and household income caps.  For buyers who can service a mortgage but cannot save enough of a deposit while paying rent, the scheme could be genuinely significant.

However, from a conveyancing perspective, the scheme’s success in the long term will depend less on the headline percentages than on the legal machinery behind the scheme as the detailed rules, costs and implementation timetable are not due until the Budget on 28^th October.

Until then, buyers, lenders, developers and conveyancers should treat the proposal as a framework rather than a finished product.

How will the Government Equity Loan work?

An equity loan is not a fixed cash debt in the ordinary sense.  Where the Government acquires a percentage interest linked to the property’s market value, the amount required to redeem it may rise or fall with that value.

The scheme documentation must explain how the Government’s interest is secured, how valuations are obtained and challenged, whether partial redemptions are permitted, what fees and interest become payable and which events trigger repayment.

There is of course a historic model for such a scheme, namely the former Help to Buy Scheme, but we cannot be sure yet whether the Your First Home Scheme will follow the exact same model and we will need to wait for the Autumn Budget before we can be certain of the full details of the scheme.

Lessons from Help to Buy and the risks of a 2.5% deposit

Lessons should also be learned from the previous Help to Buy Scheme.

A 2.5% deposit reduces the initial savings barrier, but it also leaves the buyer with very little personal equity upon completion of their purchase.  That matters because new build homes can carry a premium and may not retain that premium on an early re-sale.

Independent valuation and survey advice therefore remains important, even where the lender and scheme administrator have carried out their own assessments.

Could the Your First Home Scheme affect new-build property prices?

The data previously published by the Government in relation to the former Help to Buy Scheme suggests that the scheme may have increased prices slightly where properties were purchased with the aid of the Help to Buy Scheme (around 5% more than comparable second hand homes).

That might simply be explained by a general contention that new build homes come at a premium, but it is something which critics of new build equity loan schemes will latch onto since the new build premium naturally diminishes after the property is purchased for the first time.

The difference with the Your First Home Scheme may come in the form of the local price cap and house income cap, but we will need to wait for the full details to be announced in the forthcoming Budget.

Buyers who intend to purchase through the Your First Home Scheme should also understand that a mortgage valuation is not a survey.

In addition, any sales incentives such as gifted deposits, upgrades and cashback arrangements must be disclosed accurately to the lender and scheme administrator, particularly as an apparently modest incentive can affect valuation, eligibility or mortgage terms.

Selling or remortgaging a Your First Home Scheme property

The real test may come years after legal completion of a purchase, as we saw with some purchasers who previously bought under the Help to Buy Scheme.

Buyers must be able to sell and remortgage without disproportionate delay or cost.

The Your First Home Scheme should prescribe a swift process for obtaining scheme redemption figures and consents when they are required upon a sale or remortgage of the property.

Conveyancers acting on an onward sale or remortgage will need reliable records and a charge that can be discharged against completion monies without uncertainty.

Lessons may need to be learned from the difficulties conveyancers encountered in obtaining the necessary consent for the re-sales of properties purchased under the previous Help to Buy Scheme.

What happens if property prices fall?

Buyers will also wish to take into consideration the effect of even a marginal fall in property values when they come to re-sell their property in due course.

If for example the price of the property was to fall by 5%, this could potentially eliminate the buyer’s own equity in the property leaving the owner in negative equity, particularly if the property is being re-sold within a relatively short period of time after completion of their purchase.

Should first-time buyers use the Your First Home Scheme?

The Your First Home Scheme has good potential to help buyers whose obstacle is the deposit rather than the monthly affordability assessment and it will be a welcome scheme for developers in what appears to have become a challenging market recently.

We might go as far to say that it may also support new housing delivery by restoring demand and confidence.  But a lower deposit does not make the legal transaction simpler and in several respects, it makes careful advice more important.

Buyers purchasing their first home with the aid of the scheme will need to understand the equity they are giving up, whether they can genuinely afford to purchase their property after taking into account service and estate charges and how they can move or refinance later without becoming trapped by process or cost.

We therefore await the details which will follow the Budget in late October.  Until that detail is published, prospective buyers should keep saving where they can and obtain independent and competent mortgage and legal advice at an early stage.