To Firstbuy or not to Firstbuy

The government recently announced its backing of a mortgage indemnity scheme that will allow higher loan to value lending for buyers of new build properties.

The full details of the scheme won’t be finalised until the spring, but we have compared the new scheme with Firstbuy, the government backed shared equity scheme announced in this year’s Budget.

We believe borrowers looking at the new build indemnity scheme will share similar characteristics with those for whom Firstbuy was aimed at, in that they do not have a big enough deposit to borrow on the open market.

Here are the facts -

• With the indemnity scheme, the builder puts in 3.5% of the value of the property
• With Firstbuy, they put in 10%.
• This means the indemnity scheme will enable a builder to support around three times as many properties with the same sum of capital than with Firstbuy.
• For borrowers, it will not reduce monthly costs as a shared equity loan does, but it does not require the borrower to find a large cash sum at a future date.
• Borrowers with Firstbuy have to repay the equity loan in the future.
• The indemnity scheme will only be available to borrowers taking out a repayment mortgage. So, if in seven years house prices are roughly the same, those who borrowed with a 5% deposit today will be sitting on equity of over 20%, worked out using a notional interest rate of 5%. So anyone using the indemnity scheme to buy a property should be easily able to remortgage onto any product once their equity has increased sufficiently.

The main point to make though is that from a customer’s point of view, this scheme should re-open access to higher Loan to value lending, and many may find that preferable to share equity.

But, borrowers need to recognise that taking out one of these loans is no different to taking out any other 95% Loan to value mortgage, and they have to weigh up the level of risk with their desire to be home owners.