Q&A: equity loan scheme

Later this week the chancellor, Gordon Brown, will confirm plans to allow first-time buyers to borrow funds to supplement a mortgage, enabling them to buy previously unaffordable homes.

The shared ownership plan will offer homebuyers the opportunity to apply for a loan from either the government or a mortgage lender which will sit alongside their mortgage.

Mr Brown predicts that during the course of this parliament the equity loan scheme could help up to 100,000 first-time buyers step onto the housing ladder. It will be run by the Office of the Deputy Prime Minister (ODPM) in partnership with local housing associations.

How will the scheme work?
First-time buyers will be able to take out a loan in addition to a mortgage. When the loan is added to the amount they can borrow from a mortgage lender and any savings or contributions from their family, the amount they have to spend on a property will be enhanced.

A couple with a joint income of £45,000 would struggle to raise a mortgage to afford today's average-priced property - worth £156,128 in April according to Nationwide building society. Assuming a mortgage lender offered them two-and-a-half times their joint salary, they would be £43,628 (28%) short of the amount they need. Under the new scheme, they could apply to borrow all or some of this money - either from the government or, if they choose to get involved in the scheme, a bank or building society.

The scheme is in its very early stages and we are unlikely to see full details of how it will work until later this year. From the details that have emerged so far, it is unclear if the scheme will also be available to existing homeowners. An existing equity loan scheme which makes up part of the Key Worker Living initiative is available to those who need to upsize to a larger home to house their families.

How much could I borrow?
Until full details of the scheme are announced it is unclear how much buyers will be able to borrow. Under the current scheme run for key workers, the standard maximum loan is £50,000, although equity loans of up to £100,000 are available to a small group of London teachers.

The key worker loans are available only to those with a household income of £60,000 or below, except in the case of higher-value equity loans where the household income limit is extended to £80,000. There is no news yet on whether the new scheme will have an earnings cap.

Couples are entitled only to one loan and their joint income is taken into consideration to assess if they are eligible.

In both the existing and new scheme the loan is interest-free but is given in exchange for an equity stake in the property.

What does that mean?
Say, for example, a couple borrow £50,000 through the scheme and purchase a property worth £200,000 the lender - either the government or a bank or building society - will effectively own 25% of their new home. Should house prices rise and the couple eventually sell the property for £300,000, the lender will receive £75,000 - the original loan, plus the profits on its share.

Should property prices fall, it seems fair to assume that the lender will still get back only the value of its stake. If the £200,000 property only fetches £160,000 when it is sold, the seller will only have to give it £40,000.

As well as giving up a share of any profits from the property, the homeowner may also be required to pay rent on the share owned by the other party. The government has mentioned a "nominal" figure of 3% of the value of the share it owns, but Sue Anderson, spokeswoman for the Council of Mortgage Lenders (CML) says: "Whether lenders echo that or do something different remains to be seen".

Ms Anderson suggests that when the money comes from a source other than the government there may be additional costs involved. "We need to have some kind of charge to make up for the fact that no interest is being paid and the property may not be sold until some time later."

You've used the word couple several times - are these schemes available to single homebuyers?
When speaking about the scheme on the BBC's Breakfast with Frost on Sunday, Mr Brown said: "We have created stability in this country, and now we must ensure that the benefits go particularly to young couples who want to own their own homes, who find that house prices have been high, who could benefit from low interest rates, but they need some help to get on to the first rung of the housing ladder."

However, it is unlikely that the scheme will be closed to solo first-time buyers.

Are there any restrictions on what property I can buy?
So far, we have only been told that homebuyers can use the scheme to buy new or existing properties, but there may be some restrictions.

The Key Working Living scheme insists that buyers purchase a property suitable for their household's needs and within a reasonable travelling distance of their workplace. Mobile homes, caravans and houseboats are not allowed.

If banks and building society get involved in the scheme, they are unlikely to impose specific rules on the type of properties they offer equity loans on - if they are willing to offer a mortgage secured on a property they should be happy to offer another, smaller loan on it.

Will many lenders offer these schemes?
It's too early to say how many will decide to offer the equity loans, but the CML's Sue Anderson says it is unlikely there will be a great rush to the market. "In no way should people expect them to be universally delivered through every lender."

However she says once the system has been established and lenders are able to decide if it is a success, more may enter the market.

Nationwide building society has already expressed an interest. According to a spokeswoman: "We are in discussion with the ODPM about the scheme." And Abbey has said it "looks forward to supporting" the scheme.

Lenders who choose not to offer equity loans may still offer mortgages to buyers who apply for government funding.

Buyers who want to take part in the scheme will need to meet the same criteria as other borrowers and the mortgage they are offered will, as is normally the case, be based on how much they earn and can afford to repay.