Looking at the FirstBuy Scheme

The government-backed FirstBuy scheme introduced in the 2011 Budget is intended to give a much needed boost to the new property market, helping and encouraging first time buyers get onto the property ladder. But what is it all about?  Lucy Smallwood, Head of Residential Development at Michelmores, explains.

The government has made £250 million available for the FirstBuy scheme in the UK, £210 million of which is for England alone with the aim of helping 10,000 struggling first time buyers, as well as boosting the property industry.

In the 2011 Budget, Chancellor George Osborne stated:

"Average mortgage deposits are close to 30% and this puts home ownership beyond the reach of many many families...this is not fair."

The government's remedy to combat this issue is the FirstBuy Scheme.

FirstBuy will offer equity loans to eligible first time buyers of up to 20% of a new build property's purchase price, with buyers providing up to 75% of the purchase price through a mortgage and a 5% deposit. This loan will be jointly funded by the Homes and Communities Agency (HCA) and a developer that is part of the scheme. FirstBuy is only available for newly built properties, so properties that have been refurbished will not be eligible.

The bank mortgage will be secured as a first charge on the property; while the HCA and the developer will take a second charge over the property, in order to give security for the equity loan.

It is important to note that this equity loan will be interest free for the first five years which is intended to incentivise first time buyers to sign up to the scheme. From the sixth year there will be low interest charges with an annual interest fee of 1.75% payable in monthly instalments, and annual increases thereafter linked to the Retail Prices Index plus 1%.

The equity loan will be repaid in full when the house is sold on, and no further lending on that property will be available through the FirstBuy scheme. The money regained will be recycled back into FirstBuy to fund new homes through this scheme.

The scheme will offer loans to first time buyers with household incomes of less than £60,000 p.a. Importantly, the scheme is only for the purchase of newly built properties from developers that have been accepted onto the scheme. 

Good news for the property industry

After the 2011 Budget announcement, the Housing Minister Grant Shapps stated:

"Demand for new homes is still growing, but last year house building slumped to its lowest peacetime level since 1924.

"First time buyers are still facing huge difficulties - many young people are being forced to postpone homeownership until their thirties and creditworthy first time buyers on good incomes are missing out on the opportunity to enter housing market by the lack of a large cash deposit.

"By making up to £250 million available over the next two years for deposits on new build homes, this Budget shows that we are serious about sorting this out, and supporting our construction industry to build more homes, create new jobs and increase the pace of economic growth."

FirstBuy has been designed to get the country building again and is positive news for the industry. George Osborne hopes that 40,000 construction jobs will be created as a result of the scheme.

Which developers will be involved?

Developers who want to be part of the FirstBuy scheme must make an offer to the HCA by noon on 19 May 2011. The HCA published a prospectus at the beginning of April which outlines the criteria that developers will be assessed by, as not all developers will be eligible to join the scheme.

Following assessment, the HCA and the successful developers will then enter into a "FirstBuy Grant Agreement", which includes strict marketing obligations on the developer, as well as 50 pages of instructions to the purchaser's solicitor. The HCA hopes to enter into these agreements this summer with homes being available under this scheme from September 2011.
Many developers across the South West have welcomed the announcement of the scheme with details on their websites already asking for prospective first time buyers to register their interest.

The HCA advises that developers should not market themselves as offering the FirstBuy scheme in advance of receiving the allocation from HCA, as they could be in danger of misrepresenting themselves.

Developers should also be aware that in December 2010 HM Treasury published a consultation paper proposing changes in the regulation of second charges. Equity partition mortgages are inherently complex and subject to a raft of regulatory provisions, as well as a body of case law. Any changes to such regulations therefore need to be kept under review by developers who are participating in the FirstBuy Scheme.

Jonathan Cavanna, Marketing Director for Cavanna Homes, a South West home builder commented:

"Any support for the housing market is very welcome. Firstly for the sake of the market, where transaction levels are still a third below the five year average and where the number of first time buyers are down by about a half.

"This is welcome news for the young people themselves who are shut out of decent housing by the difficulty of raising the large deposits currently required.

"It is good news too for the lucky 10,000 first time buyers involved but one thing people should bear in mind is that the scheme is limited to one year and 10,000 people, which is about 3 percent of the first-timers entering the market this year.

"For smaller developers it is also a relatively complex scheme with a number of hoops to jump through, making it less attractive considering the number of properties likely to be sold under the scheme."

Lucy Smallwood is an Associate and Head of Residential Development at Michelmores. For further information on the issues raised in this article, please contact Lucy at lucy.smallwood@michelmores.com