6. Impact on Buyers and Other Stakeholders
This chapter focuses on the main impacts that Buyers and other stakeholders identified as having stemmed from the First Home Fund. Although these varied depending on the circumstances of the household concerned, certain consistent themes emerged around affordability, the timing of a purchase and the type of home bought. However, one major issue, namely, the terms of available mortgage offers, was closely connected to the timing of home purchase in relation to the COVID-19 pandemic.
Dealing with changes to mortgage offers
While some Buyers had already secured funding and made a home purchase in late 2019 or early 2020, for others their home purchasing experience has been set very firmly within the context of COVID-19, and in particular the impact on mortgage deals, and especially on the reductions in LTV that many lenders implemented.
Lender interviewees tended to confirm that the LTV they were offering over the summer of 2020 had shifted, usually down from up to 95% to 85%, 80% or even 75%. However, both of the Credit Unions who participated in this study have only one mortgage product to which no changes had been made.
When lenders had adjusted the LTVs on offer, they reported that these changes were not confined to First Home First and other shared equity compatible mortgages. The changes tended to be described as a response to the wider lending environment and the need to manage levels of demand. On this latter issue, and very much reflecting the pattern of applications to the First Home Fund, lenders, IFAs and developers all reported that pent-up demand had led to a surge in home buying interest and activity at the end of the national lockdown in late May 2020.
Some Buyers had already been planning to access the First Home Fund to make their purchase, but the balance of their funding package had to change due to a reduction of the LTV they could access. For example, one buyer looking to purchase a £160,000 property had planned to put down a deposit of 5% (£8,000), for the Scottish Government's equity stake to cover 10% (£16,000) and for the remaining 85% to be covered by a mortgage (£127,500). When only an 80% LTV offer was available, they applied to the First Home Fund for the full £25,000 and were still able to proceed.
Professional stakeholders reported that some prospective buyers who were no longer able to find a workable mortgage deal with one of the larger, mainstream lenders may have been able to proceed by going to a different lender. It was also reported that a small number of buyers who might otherwise have gone to one of the bigger lenders had applied for a credit union mortgage after the bigger lenders reduced LTVs. In these cases, the impact of the First Home Fund may have been to allow the purchase to proceed at all rather than to reduce mortgage repayments since credit union mortgages tend to offer less competitive interest rates than some of the bigger mainstream lenders.
For some Buyers, the use the First Home Fund was the critical bridge that allowed them to proceed when LTVs shifted in the wake of the pandemic. This was supported by feedback from Non-buyers that are waiting for the First Home Fund to reopen, as well as lenders, developers and IFAs.
"We couldn't have gotten a house without it... and it would have depended on whether the banks started increasing the level of mortgages they are offering again... we would have needed banks to offer a 95% mortgage or we just wouldn't have been able to afford it." (Buyer)
In such cases, a common scenario was for the Scottish Government's equity stake to cover the funding gap resulting from the lower LTV ratio buyers could secure, in some cases by as much as 15-20%. Some of these Buyers had initially decided against applying to the First Home Fund prior to the pandemic because they had thought they would be able to secure a 'mainstream' mortgage to buy outright. Other Buyers became aware of the First Home Fund, once it was suggested as a means of responding to changes in LTVs.
"I had been looking back last October and found something... they decided not to sell but [my mortgage advisor] had found me a 95% mortgage so I just assumed it would be OK next time...it is now only 80% so he suggested I could apply for this (First Home)...I really like this flat and didn't want to let it go so that's what I did." (Buyer)
The timing or type of purchase
Rather than being about the ability to make a purchase at all, most Buyers explained that accessing the First Home Fund had either allowed them to buy earlier than they might otherwise have done or that it allowed them to buy a more suitable, if also more expensive, property. These two factors also came together for some.
As noted earlier, a number of Buyers explained that they had been saving for a deposit on their new home for a number of years and for some this had been a considerable and challenging undertaking. Despite this effort, when starting to explore their possible options in more depth, some had found that their deposit was insufficient to allow them to buy, or that they would be left with no resources to cover purchasing fees or for decorating or furnishing their new home.
By reducing the equity stake they were taking in their new home (compensated for by the Scottish Government's equity stake), they were either able to proceed or were able to allow themselves sufficient financial leeway to cover the purchasing and other costs without having to borrow elsewhere. In terms of that borrowing there were occasional references to taking out bank loans but more frequently to informal borrowing arrangements from family or friends.
These Buyers generally thought that had the First Home Fund, or potentially another shared equity option, not been available to them they would have been most likely to postpone purchasing and carried on saving in order to increase the size of their deposit. For some this would have been expected to take a matter of months, but for others a number of years.
IFAs tended to the same view - that many of those applying to the First Home Fund would not otherwise have been able to purchase at that time and would have needed to carry on renting or living with family.
Younger buyers were most likely to have seen waiting and saving as a relatively straightforward and acceptable alternative.
"I did feel a bit behind some of my friends, so it was good... but I'd have just stayed on at home. It wouldn't have been a big deal; my parents would have been fine with it." (Buyer)
For others, particularly those who were a little older and/or had or were planning to have children, buying their first home came with a greater sense of urgency. As one IFA explained, households with children can often be very keen to get their family settled into a new home, particularly if it is a new area, in time for the start of a school year. Other professional stakeholders also referred to clients seeking to provide a secure home that met their family's needs and looking to move on from potentially very difficult living situations, such as living in overcrowded conditions or living in poor quality but expensive private rentals.
For some Buyers, and sometimes in conjunction with being able to buy sooner, the First Home Fund had opened up a greater choice of properties. For these buyers, the ability to consider a purchase of up to an additional £25,000 represented by the Scottish Government's equity stake tended to be characterised by one or a combination of the following:
- A house rather than a flat.
- A bigger property, either in terms of more bedrooms or more living space, including home working space; in terms of bedrooms this was sometimes connected to children having their own rooms or to allow children staying under access arrangements to have sufficient space to feel at home.
- A property with a garden, a larger garden or an attached garden.
- A property in a different, usually more expensive, location, generally articulated as a 'better' area. This was sometimes associated with being safer, closer to family and friends, closer to key services (such as schools, shops and transport links) or closer to work.
"The appeal was I could get a bigger house. I have a 3-bed semi-detached, by myself. Previously I was looking at a 2 bedroom flat." (Buyer)
"It let me look a little higher than would have been looking. It jumped it up by about £10,000...I managed to get a 3 bed mid terrace in the area wanted. I wanted either 2 or 3 bedrooms depending on what was available and price. I was mainly looking at 2 bedrooms, but it allowed me to go that wee bit bigger." (Buyer)
"If we didn't have the Fund, we wouldn't have got this house, in the location that we wanted as well. We had researched a lot on different prices, what would be good for the future if we do have children, thought about all of it, transport to get to work. Without it we wouldn't have this house." (Buyer)
Although one professional stakeholder suggested COVID-19 had led to a growth in buyer interest in more rural locations, the interviews otherwise gave little sense that Buyers were moving from urban to rural areas. However, Buyer comments suggested that the perceived importance of access to a garden and/or proximity to public parks and other open spaces has increased in the wake of COVID-19, especially for households with or planning to have children.
While for some the purchase of a larger home, or a home in a different area was very much associated with their immediate needs, others suggested that 'trading up' had enabled them to purchase a property that, if not their 'forever home' would be likely to meet their needs in the medium term at least. As with saving longer for a deposit, younger buyers and those without children were most likely to refer to having bought a home that they could now grow into.
IFAs confirmed that many younger or single buyers would prefer not to make what might have been considered a traditional first home purchase such as a small one or possibly two bedroom flat and instead preferred to look for something with extra space and longevity. This appeared to be mainly connected to prospective purchasers looking to avoid the need to sell and buy again over the next few years, including because of the costs and upheaval involved. There were, however, also references to people looking to make the best possible investment in terms of anticipated price growth.
Stakeholders were by and large silent about the potential impact of the temporary increase in the first-time buyer threshold for the Land and Buildings Transaction Tax from £175,000 to £250,000 at the end of July 2020. This suggests any resulting incentive for First Home Fund buyers to purchase more expensive properties may have been marginal.
Irrespective of the circumstances of the buyer, or the type of property being purchased, the most universal impact of the First Home Fund identified by those taking part in this study was to make purchasing a home more affordable.
For many Buyers, increased affordability was critical in terms of allowing them the choice to purchase a property that met their current needs and expectations and, in some cases, also their anticipated future needs and aspirations.
The focus was often on reducing borrowing levels and monthly housing costs – sometimes to below the level that standard affordability calculators suggested they could afford. For some, the ability to ease monthly mortgage outgoings was associated with maintaining a reasonable lifestyle, perhaps being able to buy things for the home or go on holiday for example. However, it was sometimes also about maximising a sense of financial security. As IFAs and lenders explained, for some home buyers, being well able to afford monthly outgoings whilst also continuing to save afforded considerable peace of mind. This was particularly important for Buyers concerned about job security or those who worried about how they would manage if interest rates were to increase significantly in the future.
"It helped us massively and I also feel like, in the times that we are in, it is really hard. For me to buy a property is quite a big achievement. I feel like it's really expensive... so that £25k that I got helped so much. It's contributed towards everything – our mortgage payments and everything else. Would have had to wait longer 100%, probably a year or two or maybe longer to feel as comfortable as we do with the First Home Fund." (Buyer)
"We managed to buy a house we are happy with... it's saved us from ending up with something we are not as happy with and higher mortgage payments... it lets us spend money on other things and not just all on the mortgage." (Buyer)
Still on the question of monthly mortgage outgoings, some Buyers and other stakeholders commented that, depending on circumstances, a reduced LTV on a property could lead to a more advantageous mortgage deal being available, especially prior to the pandemic. However, most stakeholders, including lenders themselves, reported that overall shared equity compatible mortgages tend to be less competitive than other products on the market.
"...if you are under 10% deposit the interest rate or monthly payment is much higher. It helped us go above that... and reach 19.5% or so. That's big enough for the banks to categorise it as a stable investment or a stable mortgage so we got better mortgage deals at that level." (Buyer)
Some Buyers and other stakeholders felt the relatively limited pool of lenders that offered a First Home Fund-compatible mortgage product may be having an adverse effect on the affordability of the mortgage deals on offer. They were amongst those suggesting that a bigger pool of lenders offering shared equity-compatible mortgages might result in more competitive deals becoming available.
"The only problem was there were a limited number of banks that would accept it under the mortgage... and the interest rates were slightly higher than without it. Think there were only three that you could use but if did it without the scheme then we had around 35 options. I think it still works out cheaper but if more accepted (the First Home Fund), you would have more flexibility with who you want to go with." (Buyer)
The affordability of monthly mortgage payments tended to be judged against rent levels in the private rented sector. Buyers and others consistently reported that, once the hurdle of a deposit had been overcome, mortgage repayments could be lower, and by extension more affordable, than private sector rents.
Aside from the benefit associated with greater choice and improved affordability, some other benefits were occasionally identified by Buyers, including being willing and able to invest resources in the upkeep or improvement of their property.
Closing of the First Home Fund
Due to high uptake, the First Home Fund closed to new applications on 2 October 2020. This was explained as a pause in the First Home Fund scheme which will re-open in 2021 for purchases completing from 1 April 2021 to 31 March 2022.
Perhaps one of clearest testaments to the First Home Fund's popularity, including the extent to which those who have benefited have valued the support, can be taken from the plans of those unable to access funding at this time.
IFAs and developers were amongst those commenting that many of the first-time buyers known to them are pausing their home purchasing plans and are now waiting for the First Home Fund to reopen to applications in April 2021. Some IFAs reported having many, sometimes bitterly disappointed, clients who had been planning to apply to the First Home Fund but have now put their plans on hold.
"When we heard it was closing, I had to ring round 18 clients, some of those were really difficult conversations. One or two were heartbroken, especially if they'd already found something...as far as I'm aware only one isn't waiting." (IFA)
Similarly, two of the six Non-buyers who took part in this study are also waiting for the First Home Fund to reopen. In both cases, their first application to the First Home Fund did not proceed because of an issue with the purchase property (in one case the seller withdrew and in the other major structural issues led the purchaser to withdraw).
"For me, even though people might think I have a good salary, staying in Edinburgh and renting, the cost of living is very expensive especially when living alone. Cost of living is so high that when it comes to buying a property, to have an option of 10% [from the Fund]...created an opportunity to buy something. Then unfortunately I was told that it was put on hold until next year, but I will reapply when its available." (Non-buyer)
For some this potential surge of applications did raise issues around the First Home Fund for 2020/21. The concern was partly in relation to the administrative challenges for Link in dealing with possible high volumes in April and May 2021. Beyond this practical challenge, there was a concern that, with six months of unmet need and demand to respond to, the next round of funding could be exhausted relatively early in the next financial year.
Impact on other stakeholders
While the main focus of this study has been on home buyers' experience of using the First Home Fund, other stakeholders highlighted the wider impact that the First Home Fund has had on both the developer and mortgage advice industries.
As noted in Chapter 2, all the IFAs spoken to reported that the post-lockdown period has been an extremely busy one. There were reports of a particular surge in enquiries about home purchasing in May and June, with sustained levels of interest and activity through the summer and autumn. Although the extent to which this high level of demand and activity was first-time buyer driven varied, all reported that First Home Fund-related enquiries and First Home Fund applications had been significant. For some this had extended to helping to sustain their business over what has clearly otherwise been a very challenging year.
As noted above, from a developer perspective, one of the strengths of the First Home Fund has been in allowing purchases of over the £200,000 price cap that applies to Help to Buy. Although the Help to Buy threshold was widely perceived to be too low for the Edinburgh and Lothians market, it was also reported that 'starter homes' on many new developments in many areas of Scotland were at a price point that would not allow Help to Buy supported purchasers to consider them. Options which expand choice, and which give developers confidence to build properties of varying type and size, and at a range of price points, were seen as highly beneficial.
The Slattery family’s story
Danielle is in her early 40s and lives in Glasgow with her teenage daughters. She was furloughed from her job with an energy company in March but is now back at work. She earns around £18,500 a year.
When her marriage broke up 2 years ago, the family moved into a 2- bedroom private rented flat, but it has never felt like home and she really wanted to buy a home for the family. She managed to boost their savings during lockdown and by June had nearly £4,500 for a deposit.
An IFA connected to a lender had told her about the First Home Fund and had helped Danielle explore possible mortgage options. She does not have a long credit history and the options were relatively limited – though they did find an option for up to an 80% mortgage.
A 3 bedroom flat in just the right area went onto the market in early July and her offer of £59,000 was accepted in August. She has used £3,000 of her savings for the deposit and the rest has covered the fees. She applied for £15,000 from the First Home Fund and has a mortgage of £41,000 over 15 years. As her mortgage is for less than two and a half times her salary, Danielle managed to secure quite a good deal and her mortgage repayments are around half of the rent she used to pay.
The Slatterys moved into their new home in early October.
“If I had to do it myself, I probably wouldn’t have been able to afford it for another 4 or 5 years being realistic.”