Buy now, pay later

A developer is offering 25 per cent off its houses. The catch? You pay up when you move. Stephen Pritchard reports

An area of west London best known for its service station and proximity to Heathrow airport might seem an unusual choice for an experiment in property ownership. But this is where one developer is trying out a scheme to persuade first-time buyers to step onto the ladder.

An area of west London best known for its service station and proximity to Heathrow airport might seem an unusual choice for an experiment in property ownership. But this is where one developer is trying out a scheme to persuade first-time buyers to step onto the ladder.

Bellway Homes' St Giles' Courtyard at Heston, Middlesex, is a run-of-the-mill development of low-rise blocks of one- and two-bedroom flats. What is unusual is that the developer is prepared to sell the properties for just three-quarters of the asking price.

The cheapest flats on the site cost £129,746 for a one-bed and £152,996 for a two-bed. The developer believes that this will bring them within reach of buyers who might otherwise not be able to afford them, including many who could be paying more in rent than it would cost to have a mortgage.

However, the reduction is not a simple discount - instead, the buyer is deferring paying the extra 25 per cent until they either sell or remortgage. In addition, the offer is only available with mortgages arranged through Bellway's finance arm. The developer does not charge interest on the deferred amount and, unlike a housing association shared ownership scheme, there is no rent. Instead, 25 per cent of the sale price is due to the developer when the owner moves. If the owner remortgages, they have to pay back 25 per cent of the valuation.

Clearly, Bellway is banking on rising property prices to cover the cost of the scheme, as it will share in sellers' profits. But it has not set a minimum repayment should the market fall. With prices looking flat in the London area, it is possible that some buyers could take advantage of the scheme at little or no cost. Pick one of the penalty-free mortgages on offer through Bellway, and there is nothing to prevent a buyer switching to a cheaper loan, and cutting their deferred payment, if prices fall.

Bellway spokesman Julian Kenyon concedes that some buyers could take advantage of the scheme if prices are falling, though he describes this as a "theoretical possibility". The company is, in any case, protecting itself by limiting the scheme to homes on sale at or below £210,000. It is also only open to owner-occupiers, not to landlords.

Nor does the developer appear to be clawing back the cost of the scheme through steep mortgages. Lenders Abbey, Intelligent Finance and the Halifax will accept applications for the properties and offer standard interest rates. Abbey has a tracker at 4.64 per cent, with penalties for two years, and a fixed rate until January 2007 at 5.34 per cent.

The Abbey and Intelligent Finance loans require no deposit, while the Halifax asks for a deposit of three per cent on a purchase price of up to £150,000 and five per cent above that. In all cases, the affordability of the loan and the deposit are based on the 75 per cent the buyer borrows, rather than the full price of the property. "We feel this is appropriate to the first-time buyer market, especially those who are renting and are on the border of being able to afford a mortgage," says Kenyon.

For some buyers this could represent the only way onto the property ladder, other than a shared ownership or key-worker housing scheme. But both of these have eligibility requirements that not all buyers meet. For others, paying less now could cost more in the future.

"If house prices do go up, you will only get three quarters of that growth," says David Hollingworth, a director of the mortgage broker London & Country. "People sometimes forget what they went into."

Although paying money back to the developers later might be easier than paying it now, a buyer moving up the pladder will have less equity available to transfer, and might well have to take out a larger mortgage as a result. And buyers could experience difficulties if, at the end of one of Bellway's fixed-term deals, they want to remortgage.

Any new loan would need to be for the full value of the property at that point, not the 75 per cent originally borrowed. In some cases, homeowners would simply face a rise in their mortgage repayments. In others, they might not be able to raise the full amount needed to pay off their original loan and to repay Bellway, either because they do not have a large enough deposit, or their salaries are not enough to cover the borrowing. In those circumstances, buyers would have to stay with their existing lenders and pay the (often less than market leading) follow-on rates. Over the long term, this could be a concern.

"Buyers need to ask if they would be paying more to have a larger mortgage now, or to buy out the developer's 25 per cent stake at market value. That will come down to house price increases," says Hollingworth.

Bellway points out that the deal is a pilot, which is scheduled to finish at the end of the month. But with first-time buyers thin on the ground, expect to see more such schemes as the market slows down for winter.