New rules on lending threaten home sales

A FINANCIAL lifeline that has helped keep the dreams of homebuyers alive during the property downturn in Scotland faces being severed by new regulations on loans.

Thousands of new homeowners - particularly first-time buyers - have taken advantage of "shared equity" schemes in which beleaguered housebuilding companies split the cost of purchasing a property.

The deals helped both builders and purchasers anxious to get on to or move up the property ladder at a time when the sales of new homes had virtually dried up as a result of the recession.

But experts have warned that new rules on what are effectively loans to buyers - to be introduced next year - may spell the end of the shared equity device. Homeowners who have already purchased properties under shared equity schemes may also be affected, as building companies will be prevented from administering the current deals.

Mark Hordern, the spokesman for the Glasgow Solicitors Property Centre (GSPC), said: "Builders have been able to use incentives such as shared equity and part exchange to facilitate sales. This has been particularly true recently where people have been uncertain about being able to sell their existing home and where it has been difficult to get a mortgage.

"Closer regulation of these incentives may make it more difficult for buyers, and making life difficult for builders is in no-one's best interests. Regulators have to be careful not to throttle the market and the aspirations of prospective homeowners in an attempt to protect them from every eventuality."

The forced abandonment of the schemes would be a major blow to the Scottish housing market, which is virtually stagnant at present following last year's minor recovery.

Some housebuilders, such as Glasgow-based Mactaggart & Mickel, used shared equity to sell more than 60 per cent of its new homes last year. Others, such as Miller Homes, Tulloch Homes and Barratt have all been relying on shared equity deals to boost sales. Building companies have been able to reduce financial losses and avoid the layoff of staff.

Shared equity has also been an extremely popular method for buyers struggling to get a big enough deposit to buy under restrictions on mortgage lending brought in by the banks following the financial crash. Currently, most buyers must be able to raise at least a 25 per cent deposit to buy a home.

But with house sales plummeting in the last two years, several housebuilders have offered deals where if buyers come up with a certain percentage of the purchase price, typically 75 per cent raised by a mortgage, the builder effectively "loans" the deposit, repayable at a later date.Next year, however, the rules governing who can make loans are expected to be tightened in an attempt to protect consumers, and shared equity schemes - unless backed by the government - may be banned as a result.

Lorna Finlayson, a partner with law firm Burness, has warned that housebuilders will be forced to meet the same strict regulations as banks, or establish expensive partnerships with lenders, if they want to continue offering the deals.

"Housebuilders will not be able to offer any sort of secured deferred payment arrangement nor, more worryingly, will they be able to administer existing arrangements, without either themselves being authorised by the Financial Services Authority (FSA) or perhaps, more realistically, entering into an arrangement with an existing mortgage provider or administrator," she said.

"Either way, the regulatory burden on any business that continues to offer or administer these facilities will be increased significantly."

Jonathan Fair, the chief executive of housebuilding body Homes for Scotland, hit out at the changes, arguing that shared equity was "vital" to both property buyers and housebuilders.

"Given the impact the credit crunch has had on mortgage availability and lending criteria, shared equity has become a vitally important way for builders to help people looking to buy a new home, particularly first-time buyers, on to and up the property ladder," he said.

"A prime example of the steps that the homebuilding industry itself has taken to stimulate the market and allow access to home ownership to people who would otherwise be excluded, it is imperative that shared equity schemes do not suffer at the expense of the proposed extension to regulation."

Finlayson said that the government's decision to switch secondary lending to the FSA as the government completely overhauls regulations in the wake of the banking crisis would catch out builders. "The government's announcement means that any business offering shared equity will need to reassess the way in which these schemes operate."

One couple who used shared equity last year to move home are Pamela Davidson and Stuart Gill, who bought a three-bedroom Barratt Homes townhouse in Baillieston, Glasgow, that they would not otherwise have been able to afford.

Davidson, 27, said: "The shared equity scheme proved to be a very easy process. It was really useful, as there was no way we would have been able to move here otherwise. It's a great way to get your feet on the property ladder."