First Home Fund Shared Equity Scheme: qualitative evaluation

5. Key Eligibility Criteria for the First Home Fund

This chapter sets out interviewees' views on the main eligibility criteria for the First Home Fund, focusing on those most likely to have been raised by Buyers and other stakeholders.

Being a first-time buyer

For many Buyers, purchasing their first home was a much planned, saved for and anticipated event and tended to be viewed as a natural or desirable key life stage.

Some buyers, particularly those with children, or in their mid-30s or older age groups, spoke of the security and stability they felt would come with owning their own home. In contrast to the perceived insecurity and impermanence of private renting, buying a home was seen as equating to investing in their future. This was partly about acquiring a significant asset. Equally important, however, was the ability to 'put their own stamp' on their home and the ability to have more options, around the choice of property and community in which they wished to put down roots.

"...it was just perfect... has meant that I could really buy a property where I could see myself living several years rather than a property just to get on to the property ladder. Before I was sharing. It wasn't really my space but now I do feel at home... so thankful I have my own space." (Buyer)

"I've been a renter for most of my adult life so it's more independence to own the property and do what I want to it...it gives a bit more security to be on the property ladder, especially with the way the current year has been and working from home...being a bit more comfortable in my own space and the joy of owning it rather than renting." (Buyer)

Buyers referred to looking for a property with more space, including both outdoor and working space. This was sometimes connected with the work and lifestyle changes associated with COVID-19, but also more generally with having space to allow their family, and particularly children, to grow and flourish.

"...where we're buying there's a nice sense of community... we've both got family...safe places to walk the dogs and there's a health centre and a school... if we have a baby, we wouldn't need to move." (Buyer)

"My son has a bigger bedroom, he's getting older so it's good for him to have more space. Previously all our living space was in one room, now we have a separate kitchen, dining and living room and a garden joined on to the house which will make a huge difference for my son come summer with being able to play out." (Buyer)

For a small number of Buyers, purchasing a home offered the only real opportunity to live independently - most obviously because in rural, and particularly remote rural areas, there can be little if any supply of rental housing, across either the social or private rented sectors.

Buyers often explained that they had been planning to buy a home for some time, in most cases at least two or three years and in some cases for more than a decade. IFAs also confirmed that most of their clients had been thinking about buying for a few years before first making contact to discuss possible options.

This preparation to buy phase tended to be very much focused on saving, with the high levels of support for the first-time buyer focus of the First Home Fund very much associated with the challenges of trying to pull a deposit together. In terms of the types of household most likely to struggle with a deposit, the following were highlighted:

• Those without access to financial support from family or friends. This was sometimes associated with not coming from a family that already owns their home.
• Those living in the private rented sector, and particularly those living in areas where private sector rent levels are high, either absolutely or relative to average local wage levels.
• Those mainly single adults in their twenties, planning to establish their own household. A number of the Buyers who had been in this position highlighted how central the combination of working, while continuing to live in their family home, had been to their ability to save a deposit.

A range of personal circumstances were reported to affect the ability of Buyers to save. Examples given included: being a parent, and particularly a single parent; relationship breakdown; being in low-paid or insecure employment, including zero-hours contracts; and having outstanding debts such as student loans.

While Buyers understandably focused on and supported an approach which helped them to make a first home purchase, stakeholders with an interest in the wider operation of the housing market highlighted the importance of the First Home Fund in helping to 'shore up' demand from first-time buyers and enabling existing homeowners to sell on as lenders responded to the pandemic by withdrawing most low deposit mortgages from the market. Issues relating to LTVs and changes to mortgage offers are covered in Chapter 6.

Some professional stakeholders also noted that first-time buyers are a diverse group, with more people entering the market at a later age when they had started or were in the process of starting a family. This was said to be one of the reasons why some buyers had sought larger properties, preferably with outdoor space. There was also a perception that homeworking during the pandemic had led some buyers to consider a move to a more rural location and/or to be looking for a home with workspace. However, it is too soon to assess if, and how, more flexible and home working may impact on demand in the longer-term.

Although very supportive of the First Home Fund's focus on first-time buyers, some stakeholders also stressed the importance of continued support for other sectors of the housing system. This included the availability of other shared equity products for existing homeowners looking to move to a home better suited to their changing needs, such as older homeowners with modest incomes and levels of equity.

Minimum deposit and mortgage requirement

As noted in Chapter 1, Buyers need a deposit of around 5% to access the First Home Fund, subject to lender requirements, and the mortgage on the property must equate to a minimum of 25% of the purchase price.

Buyers raised no substantial issues about either of these requirements. A few questioned lender deposit requirements and suggested that it should be possible to cover any such requirements by using a proportion of the equity stake made available through the First Home Fund.

On the other hand, most Buyers raised no objections to the principle of paying a deposit and some suggested that they had gained a sense of satisfaction and feeling of achievement from being able to save towards their new home. For some Buyers, getting into the habit of saving has also increased their confidence that they would not struggle to cover their mortgage repayments and other home ownership costs going forward.

"I'm actually pretty proud of myself. It's only a bit but I worked out I've already paid for about a third of my kitchen... not bad eh!" (Buyer)

Buyers generally felt a 5% deposit was a reasonable and achievable proportion, although those looking to buy in higher value markets sometimes noted that a 5% deposit equated to a substantial sum. This was reinforced by one IFA that noted that first-time buyers in their local market could require a deposit of anywhere from £15,000 to £20,000, depending on the type of property they were looking to buy. One IFA also noted that some buyers were looking to put down large deposits to secure more advantageous mortgage deals being available to those with a higher deposit.

This echoed lender perspectives that saving for a deposit demonstrates a commitment to house purchase and suggests first-time buyers have given sufficient thought to the substantial financial commitment they are making.

Maximum £25,000 equity stake

There was strong support amongst both Buyers and other stakeholders for the maximum equity stake taken by the Scottish Government being set at £25,000. This was generally seen to be appropriately pitched at a level suitable for a substantial majority of first-time buyers in Scotland. It was also felt to be a good fit with local housing market conditions, perhaps excepting Edinburgh and some other small pockets of high property values. In other words, a stake of £25,000 was felt to make a clear difference in terms of expanding the pool of people able to access first-time home ownership and in enabling first-time buyers to purchase a home that meets their needs and is located in the area where they want to live. These themes are picked up again in Chapter 6.

Lenders and IFAs reported that there had been a small number of cases when the £25,000 equity stake had been insufficient to allow a buyer to purchase what they felt their family required or wanted. This was generally due to very specific personal circumstances, such as a household on a modest income requiring a large family home. In the examples quoted, the buyers had been able to access the Open Market Shared Equity scheme, with its maximum Scottish Government equity stake of 40% of the purchase price.

Choice of new build or resale

For many Buyers one of the key strengths of the First Home Fund has been its flexibility and the limited restrictions on the age, type and size of property that can be bought. Some Buyers contrasted the flexibility of the First Home Fund with the Help to Buy Scheme which was limited to the purchase of newly built homes. Others, including those who preferred to buy a new build property, welcomed the flexibility of being able to purchase a property above the £200,000 limit in place for the Help to Buy scheme.

"...that there is more freedom. You can buy an older house, you can go above the £200k. You're not pigeonholed into a new build. That's the reason we didn't go for Help to Buy...you're very limited to what you can buy especially if you have children and need a specific area." (Buyer)

Being able to offer over value

Another feature of the First Home Fund that Buyers saw as a strength was the potential to purchase at over the Home Report valuation. Buyers noted this flexibility had finally allowed them to secure a home having made numerous unsuccessful bids in the past, sometimes over a period of many months or even years. For some, the combination of being able to bid above the valuation and the lack of an upper price threshold (covered further below) had been critical in enabling them to buy the property they wanted.

IFAs and lenders observed that the flexibility to offer over value was particularly important for those trying to buy in areas where there was a lot of competition from other prospective purchasers, including investors, and in high demand and buoyant housing markets such as the Edinburgh and Lothians market where properties routinely sell at prices over Home Report value.

As one IFA explained, 'buy to let' investors are aware that home buyers can be constrained by the Home Report value and often offer a small amount over that value in order to 'out compete' home buyers. At the lower end of the market, this might only amount to only a few hundred pounds, but it is still sufficient to outbid homebuyers.

There were similar reports that in some rural areas, where the number of properties coming to the market are very limited, home buyers need to offer over value in order to compete with holiday let and second home purchasers, as well as with existing homeowners with substantial equity looking to move into or retire to the area.

One IFA also reported that a possible COVID-19 related effect had been a surge in enquiries from those currently living in the Central Belt and in England, particularly London, and suggested anything that helped local people to compete with purchasers from elsewhere was helpful.

"...having the option to go a bit over, and just having that bit more to spend anyway, really is making the difference for some locals, even more so at the moment. There's not a lot to buy anyway... so otherwise they could be waiting a really long time." (IFA)

Amongst those Buyers who had purchased at over value, the sums involved tended to represent a small proportion of the property value and the decision to do so appeared to have been carefully considered, especially in relation to affordability. Buyers tended to report that the additional amount paid had either been taken from savings and/or had reduced the amount that they put down as a deposit.

Interestingly, none of the professional stakeholders believed that First Home Fund buyers being able to offer over value had so far had any significant inflationary impact on the housing market. This was primarily because they perceived First Home Fund buyers to make up only a small number of the total volume of property sales.

No property price cap

Just as being able to offer over value was seen as opening up more options and greater choice for prospective buyers, the absence of any property price cap was also highlighted as a key advantage of the First Home Fund's approach.

Developers, lenders and IFAs all welcomed the absence of any purchase price constraint, noting its particular value in opening up support to first-time buyers looking for a larger family home. Similarly, some Buyers reported that they had considered both Help to Buy and the First Home Fund as possible options but that the First Home Fund had been their preferred or only option because of the size of home they needed or the area in which they wanted to buy.

"If you are a first-time buyer and you are looking at supplementing your deposit in some way, previously you were looking at relying on the Help to Buy scheme... there aren't very many, if any, new builds in Edinburgh or East Lothian that are under the £200k mark. It's very difficult to find something...it's good because you can go above that limit and still get that bit of support...and if you want to buy a used property... [so it] provides a lot of flexibility." (Buyer)

Just as professional stakeholders did not think being able to offer over value was having any significant impact on the market overall, they also did not think it was encouraging individual buyers to pay more than they could afford. They pointed out that the standard affordability tests applied to any mortgage application were designed to prevent buyers from overstretching themselves and taking on an unaffordable level of debt.

For some Buyers, the additional £25,000 provided by the First Home Fund generally covered entirely any increase in the purchase price they were considering or had paid. For instance, one Buyer had an initial maximum budget of £210,000 but increased this £235,000 by accessing the First Home Fund.

While the First Home Fund itself applies no maximum purchase price threshold, at least one of the lenders had capped the purchase price for the First Home Fund and any other shared equity purchase at £250,000. Some Non-buyers had come up against this issue, and there was at least one occasion on which a Non-buyer had understood this to be a First Home Fund rather than a lender-related cap.

No means testing

Unlike other Scottish Government shared equity schemes, no means testing of any kind is required to access the First Home Fund. This was seen as a positive development by both Buyers and professional stakeholders. Part of the much-valued simplicity of the First Home Fund stemmed from the fact that a potential buyer, as well as anyone advising them, was able to tell almost instantly that the First Home Fund would be an option.

"All you really need to check is they haven't bought before. After that there are none of the other hoops and you don't need to ask for a whole lot of information to be able to put it out." (IFA)

Buyers themselves generally considered the absence of any income-related criteria as being a positive, including in some cases having been surprised that they themselves could apply.

"I didn't think [it] would apply to me because I'm in decent job, making good money. I thought it was more for people who were struggling... [but]... when they said I could apply I thought ok." (Buyer)

A number of stakeholders commented that even those on mid-range incomes (sometimes referring to those earning in the £30-£40,000 range), can struggle to buy their first home in certain areas, depending on the type of property they wanted or needed. It was reported, for example, that people delivering key public services that had to live in reasonably close proximity to their place of work could struggle to get a foothold in some local markets. This was highlighted with particular reference to rural, and particularly remote rural areas, where the supply is likely to be limited supply and potentially dominated by expensive properties.

However, a small number of stakeholders disagreed and felt than an income threshold would help to ensure that support was targeted at those who needed a 'helping hand' to be able to buy. Those in favour of targeting felt such a move would be 'fairer' and help to make the best use of public funding, especially in a context where demand for the First Home Fund was likely to continue to exceed the overall level of funding available.

"The only thing I would say is I wonder if everyone needs it. I know someone – he already has a flat, they are both in good jobs - in a way I'm pleased for them, but when I heard [the First Home Fund] closed, I thought maybe someone needed it more?" (Buyer)

On a similar theme, the appropriateness of only one of those making a joint purchase needing to be a first-time buyer was also queried; the suggestion was that if one of a couple has already got over the first hurdle to home ownership, most obviously in terms of having got together a sufficient deposit, then there is no obvious reason for their second purchase to be eligible for a First Home Fund designed specifically to facilitate first-time buying.

Both IFAs and developers reported instances where they had steered potential buyers away from making an application to the First Home Fund if their assessment was that the purchaser could proceed without any assistance. This was sometimes connected to trying to ensure that funding remained available for those who could only buy through a shared equity option. In other cases, it was connected with a wider range of more advantageous mortgage deals being available to those not going down the shared equity route and/or to a purchaser benefitting from all of any growth in the property's value if they sell.

No interest payable

A further difference between the First Home Fund and other shared equity products available elsewhere in the UK is that no interest becomes payable on the Scottish Government's equity stake at any point. Buyers had a good understanding of this feature of the First Home Fund.

Although not always central to why Buyers thought that the First Home Fund was a good option for them personally, the fact that no interest was payable contributed to their sense that the First Home Fund was a very good deal for first-time buyers. For those Buyers who felt it was a key feature, it was seen as creating greater certainty about the affordability of their housing costs over the medium to longer term and was connected to a sense of greater financial security and stability going forward.

From a lender and IFA perspective, no interest becoming payable was also seen as helpful in terms of longer-term affordability, and in particular as removing one of the possible pitfalls people can experience with other schemes if they lose sight of charges kicking in.

When the First Home Fund is not an option

Two out of the six 'Non-buyer' interviewees are hoping to reapply to the First Home Fund when it reopens for applications in April 2021. One of the other interviewees had applied to the First Home Fund in September 2020 and at the time of being interviewed expected a First Home Fund-supported sale to go ahead very shortly.

Three interviewees had not proceeded with a First Home Fund-supported sale. In one case, the interviewee had bought the new build property originally planned, but after the First Home Fund closed had gone ahead using Help to Buy. Their preference would have been to use the First Home Fund, as they saw it as a better option overall, but Help to Buy offered an acceptable alternative.

The two remaining interviewees have both now made a home purchase, but neither have accessed a shared equity scheme:

• One had made an agreement to purchase a new build property as a part-exchange. Having applied and received confirmation that the £25,000 equity stake would be made available, it subsequently emerged (when the issue was raised by the interviewee's solicitor) that that the First Home Fund was not an option when a part-exchange was involved. No other shared equity scheme was an option and the interviewee had to raise the £25,000 in order to allow their purchase to proceed.
• One had been unable to proceed with the First Home Fund because they were not able to access a shared equity mortgage for the purchase price of around £300,000. It is understood that they had applied to a lender that has limited shared equity compatible mortgages to a purchase price of £250,000.

In addition to the experiences of these two Non First Home Fund buyers, some professional stakeholders cited other circumstances when the First Home Fund may not be a possible, or the best option, for a first-time buyer. These were:

• When the £25,000 maximum equity stake available from the First Home Fund is insufficient to allow a purchase, but the 40% equity stake possible through the Open Market Shared Equity scheme is greater than the £25,000 and high enough to allow for a purchase. This was generally described as being associated with larger family homes (with a correspondingly higher purchase price), and a buyer with a relatively small deposit and/or on a relatively limited income.
• When the prospective buyer does not strictly need to access the First Home Fund and significantly more advantageous 'mainstream' mortgage products are available.

The Parveen family’s story

Ayesha and Faraz are a young couple with a new baby who live near Glasgow. Faraz works for a recruitment company and the family’s income is around £38,000 a year.

The couple were originally planning on going down the Help to Buy route and were almost ready to proceed with purchasing a semi-detached property when Ayesha’s father found out about the First Home Fund from a developer’s promotional materials. They realised that using the First Home Fund would allow them to buy their 3 bedroom ‘forever home’.

They had already seen and were ready to move ahead with a new build property back in late February, with their home expected to be ready in June. The purchase price was £235,000 and they had savings of just over £20,000. The original plan was to put down around £12,000 as a deposit, take out a 90% LTV mortgage, with the outstanding amount (£17,500) coming from the First Home Fund.

Various delays meant that the sale and mortgage agreement were not finalised when the impact of COVID-19 really began to affect mortgage offers – their 90% mortgage offer was no longer available, although a mortgage broker did find them an 80% LTV deal.

By increasing the size of their deposit and applying for the full £25,000 from the First Home Fund, they were still able to proceed and moved into their new family home in August.

Ayesha said…

“With everything that’s happened – lockdown, baby coming – being able to have that extra money there... has been great. If we had never had that... there’s a chance we could possibly have lost the house.”