First-time buyer scheme aims to open up housing ladder in Budget 2011

First-time buyers were thrown a lifeline by George Osborne in today's budget in the shape of a £250m assisted deposit scheme for new homes.

The First Buy scheme will be open to those with a household income of less than £60,000 a year who can put down a 5% deposit on a new home – but housing industry insiders claim it is "window dressing the wider problem" and will benefit the construction industry more than first-time buyers.

Those who qualify will be eligible for a loan worth up to 20% of the value of the property, jointly funded by the government and housebuilders. The loan will be interest-free for five years and only be repayable when the house is sold.

Osborne intends the fund to help first-time buyers who are currently only able access mortgages requiring much bigger deposits, as lenders tightened their criteria in the wake of the credit crunch and recession. The government hopes the fund will result in the building of 10,000 new homes and protect 40,000 jobs in the construction industry.

But Matt Griffith of first-time buyer pressure group PricedOut said the fund could be dangerous for potential borrowers: "When independent economists are predicting a 10% fall in house prices this year, having the government encouraging first-time buyers to get on to the ladder using a 5% deposit looks foolhardy at best and, at worst, pretty irresponsible.

"Osborne is behaving like a shopkeeper trying to shift overpriced stock by offering a clever financing scheme. Consumers would be wise to be sceptical and steer clear – the big problem is that prices are still far too high".
Griffith added: "It's main purpose appears to be to help bail out the house building sector – which is suffering from buying too much expensive land at the peak of the boom. We saw plenty of these schemes under the Brown government, and it is depressing to see the coalition continue to connive with the building industry and act against the best interests of consumers."
Nick Hopkinson, director of property company PPR Estates, was equally disparaging about the government's idea: "Any gimmicks around helping first-time buyers with temporary deposits on new homes will not make a meaningful difference.

"This kind of initiative should be funded through reduced selling prices by the builders or the private sector if they need to make their product more saleable. If the chancellor wants to really aid the housing market in a sustainable way I believe he should be forcing the taxpayer-owned banks to reduce their lending margins and offer fair and affordable mortgages to Britain's hardworking households as a first step.

"Anything that reduces the high transaction costs and taxes related to buying and selling property would also really help property market liquidity – specifically outlining a fairer stamp duty sliding scale approach would help, but I'm not expecting that to happen either, unfortunately."

The budget initiative is similar to the recent tie-up between 15 local authorities and Lloyds TSB to launch a fund to top up the deposits of local first-time buyers. The scheme, called Local Lend a Hand, allows first-timers to buy a home with a deposit of as little as 5%. But it will also only assist a small number of borrowers, while the local authorities have been criticised for using taxpayer money to encourage younger borrowers to take on debt at a time of uncertainty in the housing market.

Nicholas Leeming, business development director at Zoopla.co.uk, said first-time buyers currently pay an average deposit of £25,000, which would plummet to an initial £6,250 for those taking part in the scheme.

"This is a very appealing prospect, but Osborne's scheme won't go beyond scratching the surface of the problem faced by the vast majority of first-time buyers, as it is exclusively for new-build properties and only around 11,000 buyers will benefit – a fraction of the overall number of potential first-timers.
"While the availability of credit is slowly easing, it's not easing fast enough to help those borrowers who don't qualify. A step in the right direction these measures may be, but they're merely window dressing the wider problem."

Ian Ward, chief executive of Leeds building society, welcomed the support package for first-time buyers. Today announced it will increase its mortgage lending by 40% this year to £1.4bn – a significant percentage of which will be to first-time buyers. Its typical shared-ownership mortgages offer up to 95% of the borrowers' share, so the deposit required is smaller than with a traditional mortgage; if a borrower is buying 50% of the property, they only need to find a 2.5% deposit.

Ward said: "We know from our own experience that the biggest barrier to homeownership can often be saving for a deposit, and this scheme is a positive step by the government."

Richard Sexton, business development director of e.surv, added that the scheme would unlock the lower end of the property market and ultimately generate more transactions through the chain, "provided that other budget measures don't so severely curtail ability to buy that the effect is completely negated