12 Dec 2014
Iain Considine, Senior Partner, comments on shared equity value avoidance and the Help to Buy scheme.
With rising property prices and limited lending, the introduction of the Help to Buy scheme has been seen as a shining light for many first time buyers. The offer of a 20% loan from the Scottish Government and the need for only a 5% deposit has provided many with the helping hand they needed to get on the property ladder. Indeed uptake has been high with over 3000 new homes being purchased through the scheme since it was launched in Scotland. As house prices continue to rise the Government is set to make a handsome profit when these scheme participants sell their homes and they are able to claw back 20% of the sale price. That said, as the law currently stands, if these participants do not sell their home in the next 20 years, the scheme has the potential to be not so fruitful for the Government.
The Land Tenure Reform (Scotland) Act 1974 makes provision for borrowers to redeem a security over their property 20 years after it was executed, by repaying the sum of money originally advanced plus any interest and expenses. This was originally intended to prevent Feudal Superiors from creating new Feus through securities with very long terms. However, this has now unwittingly created a situation where, in theory, those using the Help to Buy Scheme may be even more thankful of it in 20 years time than they are now.
For example if a person were to use the Scheme to buy a home for £200,000 and the Government provided 20% of the equity as a loan of £40,000 and then the person sold the property two years later for £250,000, the Government would expect to see a repayment of £50,000. However, if the person were to keep the property for 20 years and then sell it for £400,000, the individual would be entitled to pay off the original £40,000 and then pocket the remaining equity. Now before all the tax payers cry out at the injustice of this and first time buyers rush off to sign up to scheme, the Government is aware of this loop hole and has made attempts to close it.
Participants have been required to sign a new security in favour of the Government, 19 years after they purchased the property due to a break clause in the Help to Buy Scheme agreement. However, many people will have taken out a mortgage for the remaining 75% of the value of the property on a repayment term in excess of 19 years. Recently, the Council of Mortgage Lenders and many of its members who, are providing this additional funding, have refused to participate in the scheme on the basis of this break clause. Without these lenders the Help to Buy scheme simply cannot function putting many back in to the position where they cannot afford to buy a house. Given this, the Scottish Government this week has launched a consultation on their proposals to excluded shared equity schemes, such as Help to Buy, from the remit of the 1974 Act.
Given the high levels of participation in the scheme so far, it is undoubtedly popular with buyers. As we saw from the headlines in July the funding for this financial year ran out before the end of the first quarter. With funding only in place up until the end of the next financial year and up take for this period appearing strong surely the Government is legislating on an issue that, along with the scheme, may not exist in the future? Or does this recent consultation suggest that the Scottish Government is committed to the Scheme in the much longer term? Either way it is clear that there is no time like the present to secure a property using the Help to Buy Scheme.