New Mortgages - New mortgages and equity loans

Published: 10 November 2008

New mortgages and equity loans
You may have heard of shared ownership and shared equity schemes, but never really understood what they are about. Shared equity schemes were introduced to help those that cannot afford to buy their own home outright. Through shared ownership you buy a share of the property and pay rent on the other share. The idea being that gradually you may buy further shares, until you own the home outright. On September 3rd 2008 the Government announced the introduction of HomeBuy Direct, a £300 million scheme that will help up to 10,000 first-time buyers into affordable homeownership until 2010. Buyers will be offered an equity loan of up to 30% of the value, co-funded by the government and the developer, free of charge for five years. As with other HomeBuy schemes, any first-time buyers whose household income is under £60,000 will be able to apply. There are two main schemes, with ‘equity loans’ becoming more popular as ways of funding your dream home.
1. New build home buy
Purchasers will buy a minimum initial purchase of 25% of a newly-built home. A housing provider will own the remainder. The provider will be able to levy a charge of up to 3.0% on its share. A lower target average for the charge will be set at 2.75%. Purchasers can then buy further shares in their home should they wish and when they can afford to do so.
There will be flexibility within the HomeBuy framework for providers to offer schemes that meet the needs of people with long-term disabilities. This will include the option for people to purchase homes on the open market that are suitable for them, on a shared ownership basis.
2. Social/council home buy
This scheme allows tenants of local councils and housing associations to buy a share in their current home at a discount. The two main potential purchase routes being ‘right to buy’ for council tenants and ‘right to acquire’ for housing association tenants. See The Right to Buy schemeRight to Acquire for further info. Also check out your local council site to see what is available Find your local council.
3. New mortgages and equity loans
With shared equity, the first time buyer does not own the property in conjunction with any other party (unlike shared ownership) but takes out more than one loan for the property. A mortgage and an ‘equity loan'. You are the only person on the deeds. There is no co-owner. However, when the property is sold, the ‘first time buyer' has to repay the loans and a proportion of any increase in equity of the property to the party making the ‘equity loan'. The other party can be the builder or developer, but in most cases would be the bank or building society.
This scheme may be for you if you are able to meet most of the costs of buying a home. A good example of the equity loan scheme is the ‘Open Market HomeBuy' scheme. The two main options within this initiative offer key workers and other first time buyer’s access to an equity loan of up to 50% of the property's value. Eligible applicants have a choice between finding their own mortgage or picking a competitive deal through The Co-Operative Bank. These new services replace the former Open Market HomeBuy shared equity schemes
Ownhome is provided by a partnership between Places for People and The Co-operative Bank. Ownhome gives people the chance to take up to 40% of the value of the property in an equity loan from Places for People. They would pay nothing at all for the first five years on the equity loan. After these five years, a low rate would be paid on the sum – starting at a fixed rate of just 1.75% interest per year for the next five years, and then increasing to 3.75% interest per year from year eleven. The remainder would be funded through a conventional mortgage with The Co-operative Bank. There will be no premium or extra charges on the mortgage, and customers can choose from a range of competitive deals including fixed rate and tracker options. Customers can apply directly by telephoning Ownhome on 0845 607 0110.
MyChoice HomeBuy enables applicants to apply for a mortgage with any lender they choose. The scheme would provide them with up to 50% of the value of the property as an equity loan. The remainder would be funded through a conventional mortgage with a Financial Services Authority regulated lender. They would pay a low rate of 1.75% per annum on the equity loan funded by one of eight housing associations who are acting as equity loan providers*. The rate they pay on the standard mortgage would depend on the deal selected through the mortgage providers.
With both products, no deposit is required, but is allowed. When the property is sold, the equity loan provider will be entitled to a share of any increase in the value of the property. Although mortgage rates at an all time low, rising house prices and the decline of first time buyer-specific mortgages has put pressure on people buying their first home – particularly key workers.
This means a household with an income of £32,000 could afford a house of £200,000, paying £760 each month – as opposed to £1,350 without the scheme.
A £1500 grant to help with moving in costs is also available to selected applicants.

Applicants will need to contact their HomeBuy agent - a one-stop-shop providing affordable housing options across the UK - or phone the Ownhome information line on 0845 607 011.

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