The First Home Fund (FHF) is a pilot shared equity scheme which was launched by the Scottish Government on 18 December 2019. It aims to help first-time buyers purchase a property that meets their needs and is located in an area that they want to live in.
The FHF represents a significant policy intervention in the Scottish housing market and, as the first year of this pilot scheme has now concluded, we need to evaluate its performance. The evaluation of the FHF has two strands, consisting separately of quantitative and qualitative research. The quantitative research includes analysis of scheme and housing market data, while the qualitative research reports on the findings from interviews with FHF buyers, lenders, developers and independent financial advisors.
The quantitative research has been carried out by Scottish Government analysts, while the external research company Craigforth has carried out the qualitative research, and the findings strands are published in two separate reports that can be accessed through the Scottish Government's FHF website.
The purpose of this document is to summarise the findings from the two reports. The analysis summarised in this report took place between October 2020 and January 2021.
About the First Home Fund
The FHF provides an interest-free equity loan worth up to £25,000 towards the purchase of a property by a first-time buyer. There are no purchase price limits or means testing. The funding provided by the Scottish Government is converted into an equity stake, which is the amount of Scottish Government funding as a percentage of the lower of the purchase price and the property valuation. A buyer must contribute a deposit of at least 5% of the purchase price. A buyer can offer more than the valuation of the property, but must make up the difference in cash if they do so.
For the purposes of the scheme, a first-time buyer is considered to be someone who does not own, nor has previously owned, a dwelling in Scotland or anywhere else in the world. If a joint purchase is being made, only one of the purchasers needs to be a first-time buyer in order to qualify for the FHF.
The Scottish Government's share in the property will normally be repaid when the property is sold. However, buyers have the option of increasing their share beforehand (with some conditions). The FHF cannot be used in conjunction with other Scottish Government shared equity schemes.
Link is the administering agent for FHF and there are currently twelve mortgage lenders participating in the scheme.
The Scottish Government committed £200 million to the FHF over the period from 18 December 2019 until the scheme temporarily closed to new applications on 2 October 2020, and there has been considerable uptake: as of 1 December 2020, 9,729 applications to the FHF had either been approved or settled. These applications are equivalent to nearly one-third (30%) of all new mortgages advanced to first-time buyers across Scotland in 2019/20.
The example in the box below, taken from the quantitative evaluation, shows how a purchase under FHF works:
Example of Buying a Property with the FHF
John is a first-time buyer and identifies a property that he wants to buy in Dundee. The property has a home report valuation of £160,000 and John decides to bid £8,000 over this. This offer is accepted and John applies to the FHF for an interest-free equity loan of up to £25,000.
- Property valuation: £160,000
- Mortgage amount: £136,000 (85% loan to value (LTV)
- Buyer contribution: £16,000 (5% deposit and £8,000 bid over valuation)
- SG contribution: £16,000
- Purchase price: £168,000
- Buyer stake: 90%
- SG stake: 10%
The Scottish Government's equity loan is converted into a percentage equity stake by dividing the equity loan amount by the property valuation. In this case it is 10%. John owns the property and the value of his equity stake is 90%.
In ten years' time, John decides to sell his property which is bought for £200,000. John hasn't increased his equity share so he receives £180,000 (90% of the sale price) and the Scottish Government receives £20,000 (10% of the sale price).
The research questions, the data sources and methodology are set out in the Appendix. The main findings across the quantitative and qualitative reports are summarised below.