FirstBuy – a Helping Hand to First Time Buyers?

FirstBuy – a helping hand to first time buyers?

by Caleb James on 13 Sep, 2011

If you’re desperately trying to jump onto the bottom rung of the property ladder, you will know very well that it is not easily affordable. House prices remain strong but, even with record breaking low interest rates from the Bank of England, the mortgage deals available have not reflected this. For many young people, the dream of owning your own property has become just that – a dream. But has George Osborne thrown them a lifeline in the March 2011 budget?

The biggest hurdle in buying your first property is saving for a deposit and as house prices have increased faster than salaries, the deposit necessary has ballooned. To make matters worse, banks have tightened lending since the 2008 banking crisis.

George Osborne’s helping hand is the FirstBuy Direct scheme that should be available from September 2011. The government have released funds of £210 million forEngland and another £40 million for Scotland, Wales and Northern Ireland.

How does FirstBuy work?

House builders and the government will jointly loan 20 per cent (10 per cent each) of a new build property and this tops up the 5 per cent required from the first-time buyer. This now allows the buyer to obtain a 75 per cent mortgage that will be more favourable than if they were looking at say a 90 per cent mortgage.

The ‘equity loan’ will be interest free for the first five years. In year 6 and onwards, interest is charged at 1.75% and then at RPI (retail price index) inflation rate plus 1% thereafter. When the property is eventually sold, the 20 per cent has to be returned to the lenders and is returned to the government ‘pot’ for the benefit of other first time buyers.  It is estimated that 10,000 buyers will buy for the first time once the scheme is live.

The scheme is a loan and the capital loaned must be paid back when the property is sold or after 25 years. It is important to note that the repayment is 20 per cent of the final sale price and so the joint lenders are benefitting from future profits, if any.

To qualify for FirstBuy, you must have an annual income of £60,000 or less and have a deposit available of 5 per cent.

The downsides:

  • FirstBuy only applies to new build properties.
  • New houses for sale may be limited to secondary locations.
  • The previous labour governments HomeBuy Direct scheme launched in September 2008 allowed a (more generous) 30 per cent ‘equity loan’.
  • Property prices could cool over the next few years leaving new first time buyers in a negative equity situation.
  • Because of the benefits of this scheme, buyers are expected to exhaust the available funds quickly so there could be a scramble for funds.

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About the Author

Caleb James


Caleb James is a financial advisor and journalist, who contributes regularly to financial blogs and industry publications.