Beware of the Help to Buy Scheme

The Help to Buy shared equity scheme designed to get people onto the housing ladder has its benefits but those who may be enticed by developers to make use of the ‘leg up’ must exercise some caution.

There are clearly signs that the property market is recovering, with the Royal Institution of Chartered Surveyors reporting that demand rose to its highest level for more than three years after the April launch of Help to Buy. New buyer inquiries were at their highest level for more than three years, and the scheme was starting to make an impact, the institute said.

However some of the methods developers are using to market their properties to first-time buyers who might be eligible for the Help to Buy shared-equity programme are being called into question.

What is the Scheme?

Under the scheme, which is expected to trigger 74,000 sales, the taxpayer provides an interest-free loan of 20pc of the purchase price for five years, to enable a borrower to buy a newly built property. Home buyers still need a 5pc deposit, but this additional loan should enable them to buy a property they couldn't otherwise afford. Help to Buy mortgages can be used on properties valued up to £600,000.

Participating mortgage companies will then grant an advance of the remaining 75pc of the value. After five years, the homeowner has to pay interest on the outstanding 20pc at a rate of 1.75pc, although this will rise by inflation plus 1pc annually thereafter.

However, it has been reported that developers are marketing their properties at prices 20pc below the correct asking price, implying that the equity loan is a discount or free gift.

A property for sale by a certain large developer, for example, priced at £439,500, was also advertised separately at £351,600 – indicating that the property was cheaper than it actually was.

Slicing money off the price implies it is a gift from the Government. It is not. An equity loan is precisely what it says it is. It is a loan that has to be repaid. This may encourage people to take on debt, which is not understood, or to overstretch themselves and buy properties bigger than they can afford.

New homes tend to be more expensive. According to the latest report from Halifax, the average cost of a newbuild home is £233,822. This compares with the average property price of £166,000 in April.

Indeed, a large section of the mortgage market has turned its back on the new shared-equity scheme. Only Halifax and NatWest, both part-owned by the Government, have embraced the scheme enthusiastically, although Woolwich is also offering Help to Buy loans.

So what are the pitfalls of this scheme?

·    You can participate only if you do not own any other property.

·   If you want to buy the Government out, you can do so, but there will be costs. You can increase your equity, but only in 5pc slices. Each time the property must have an independent valuation, which you will have to pay for.

·    You may also face problems if you want to extend or alter the building, as you have to seek approval, which may not be forthcoming. Increasing the value of the property through a large extension can make subsequent equity valuations problematic.

Advice

·     Buying a new property means you will be invariably be paying more for the property than the equivalent second hand property so make sure you look to negotiate the price down.

·    Look to work out how much you will paying under the scheme and the mortgage in 5 years time – will you be able to afford it.

·     Don’t be drawn in by misleading sales talk.

·     Remember it will  be expensive to increase your equity in the property.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Do not purchase a New Build Property without first reading this....

Buying a property which has yet to be built, or which is newly constructed should be approached with care and here are some tips which will help:

Remember those friendly and helpful people within the sales offices are sales people and are no different from those people who you would find in car and double-glazing showrooms.  They are paid on results and work under the pressure of targets.   Once they have you signed up they will be your best friend and be in regular, sometimes daily, contact until they have collected all of you money.   There are many instances when this shadowing could be conceived as harassment.  If you consider there is undue pressure look to see if the developer subscribes to the Consumer Code for Homebuyers (http://www.consumercode.co.uk) and make a complaint.

• At the outset you will be asked about whether you have a mortgage and a solicitor to undertake the legal work.   You will be steered towards making use of the developers preferred brokers and solicitors.  These are ‘partners’ who have been chosen to work with the developer as the developer expects those partners to report to them regularly and to do all they can to ensure the developer meets its sales targets.  The sales team will push you to use these partners often saying it will be less expensive and a lot quicker.  More than often it is not.  I have heard of a case where a potential purchaser who was insisting on using her own solicitor was told she could only do so if the developer’s head office permitted it!  There is also a high level of misinformation given about other conveyancers e.g 'they are too slow', ' they are not very good'. 'we would not recommend them' etc 

• The use of the developers preferred partners should be avoided for several reasons

• How can you guarantee that the preferred partner is not acting with only you best interests at heart?  The ‘tie in’ with the developer could lead to a conflict of interests. They might be less willing to advise you not to purchase in fear that if they did this could lose a tie to a lucrative source of work. This a particular risk when purchasing a leasehold new build property and when advising on onerous rent review clauses.  

• You may not be getting the best deal in town.   You may be able to get a more competitive fee/mortgage product elsewhere if you were able to shop around.

• Make sure before you sign the reservation form and part with your hard earned cash that you seek legal independent advice because once signed you may if you withdraw lose your reservation fee.  If the developer subscribes to the Code you should be able to recover most of your reservation fee. 

• Many developers are selling more properties on the back of the Government’s Help to Buy Scheme.    This is a gift from heaven for some sales teams as is makes the sale that much easier.  Beware however of signing up before understanding fully the ins and outs of the scheme.  I doubt many of those selling understand the scheme and are failing to provide any or an adequate explanation of its workings at the point of sale. For further information visit here: https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-mortgage-guarantees    Keep in mind you may be paying more for the property than you might have otherwise paid if you had purchased outside the Help to Buy Scheme.  Always get the property independently valued. 

• There are other important aspects of the purchase which you may not be told about at the time you are asked to sign the reservation form

• If it is a leasehold flat you will be required to pay an annual service and ground rent charge even if the estate is not fully developed. This can amount to an extra payment of £200 – £1000 each year.  The ground rent charge is likely to be reviewed and increased from time to time. Make sure you understand the basis of the review.  Onerous rent review clauses could make the property difficult to sell.  My advice is not to purchase a new build leasehold where there is a rent review clause that provides for the rent to double at regular intervals. 

• If it's not a flat you may still be required to make a contribution towards the cost of maintaining shared facilities such as a play area for example.

• You will be required to pay a contribution to the cost of the developer’s legal costs even though the documentation is on a word processor and takes little effort and resource to produce.

• It is unlikely that you will see your final completion statement detailing extras and other expenses until a few days before you complete making it difficult for you to query figures.

• There is a date by which you must exchange otherwise you will lose your reservation fee. Make sure you are happy with this deadline and if you agree   new deadline make sure it is confirmed in writing and be careful as it is known that contracts can be withdrawn before exchanged with little notice, especially if the sales office can find a buyer who might be prepared to pay a higher price.  

• The contract and other legal papers you will be required to sign are looked upon as ‘closed’ meaning the developer will generally not allow your solicitor to make any changes to the provisions it contains.  

In conclusion my advice is as follows:

• Ask yourself is a new build the right property for you  - don’t get carried away with the sales talk. 

• Always take independent legal advice on the legal aspects of the purchase before signing a reservation form and handing over the reservation deposit.  If in doubt see if you can agree a reduced deposit so as to minimise the penalty if you have to pull out before signing the contract to purchase. 

• Resist the pressure and tactics deployed to persuade you from the using the developers preferred legal or broker partner and make a free choice on the advisor you choose to look after your interests.

• Make sure the sales person tells you all about the Help to Buy scheme if it applies and also about all hidden costs such as service charges and ground rent.

• Find out before you sign what other building is to take place around the plot you are purchasing and when will the whole development be concluded.  Ask also about the developer’s policy on Social Housing and where this part of the development is to be based.  These are important factors since they could impact on you use and enjoyment of the property.

• If the purchase involves a doubling rent review clause keep well way from the property. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidp@mjpconveyancing.com 

Beware of the Green Deal - it could all go Pete Tong!

Homeowners will be besieged with offers of energy efficient improvements to their home with the headline of ‘no up-front’ costs but as with most deals which appear to good to be true, there are pitfalls.

The reality is that Green Deal providers foot the bill with the homeowner repaying the debt over time via a charge on their energy bills.  Sounds simple.

The arrangement is essentially a loan and therefore protection is provided under the Consumer Credit Act. This means the provider is obliged by law to provide certain information, such as the total charge for credit, any APR, how repayments are calculated, information about cancellation rights etc.  That’s the good news.

The bad news is that, like anything bought on credit, improvement works will cost significantly more than they would if paid for up front.  As to whether the hem owner will be advised of cheaper alternatives will remain to be seen.

There is a sort of a safeguard through what is known as a "Golden Rule" – that the cost of repaying the loan should not exceed the estimated energy savings each period. So, for example, if it is estimated you will save £50 a quarter on your energy bills, your Green Deal provider may not recover more than £50 a quarter from you to pay back your loan. But the key word here is ‘estimate’ what if the actual savings are less?   Does this mean the provider will refund the difference?  In short the answer is an emphatic no.   The risks will be explained but I suspect little emphasis will be given to the same.

The other downside is that the ‘debt’ follows the property and not the person who took the loan out.   This means when the homeowner sells it will be the buyer who picks up responsibility for the liability.  Purchasers may not be able to afford the repayments, particularly first time buyers.

The scheme seeks to address this concern in two ways. First, there are extensive rules about disclosure – anyone selling a property must tell a prospective buyer if there is a Green Deal attached to it; the buyer must be notified before the seller accepts an offer at the very latest. Second, the code of practice states that if the occupier of the house changes, the provider should reassess the affordability of the plan for the new occupant.

This presents practical problems and could make a property with a Green Deal attached more difficult and/or more expensive to sell.  The disclosure requirements are strict, and a buyer must consent to any Green Deal in writing.  A homeowner who fails to obtain such consent will have to pay compensation. What if a buyer does not want to consent?  There is little the seller can do beyond negotiating. They could, for example, offer to pay off the loan in full. In such cases, however, they should be prepared to pay an early settlement fee, and may well find themselves out of pocket if a buyer does not agree to any corresponding increase in the purchase price.

Even if a buyer does consent to the Green Deal, the reassessment requirement may disclose no or little saving given the buyer's needs and energy usage will inevitably differ. A buyer may therefore want the reassessment done before deciding whether to make an offer on a property, all of which is likely to take time.  This could cause delay or even the collapse of the transaction.

The idea is good but when you drill down and consider the small print as well as the complications that arise on the sale of the property, one is bound to seriously question the benefit of the estimated short term saving.  

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidp@mjpconveyancing.com