The Scottish Ministers First Home Fund Scheme (which we shall refer to throughout this Guide as “FHF”) is generally summarised as being;
A. an interest-free loan from the Scottish Government of up to £25,000 or 49% of the value of the property, whichever is the lesser, towards the purchase of a property; and
B. a loan where there is no fixed repayment period and no requirement to make regular repayments. The amount received under FHF is expressed as a percentage of the property`s value at any point in time.
Under FHF purchasers can purchase any property whether newly built or from the open market. At least one of the purchasers must be a first-time buyer and if any purchaser already owns another property, they must sell it before they complete the purchase of the new house.
A purchaser can only be eligible for FHF if they can meet the affordability criteria set by Scottish Ministers. This is based on the level of mortgage which the mortgage lender should be able to offer and the deposit which the purchaser is able to pay.
A purchaser must be able to provide a deposit of at least 5% of the purchase price, together with a capital and repayment mortgage of at least 25% of the full purchase price.
Scottish Ministers have produced extensive guidance and examples on their website to explain the FHF criteria further, this can be found here, and we would suggest that you take the time to have a look at the guidance.
To comply with FHF the purchaser must:-
1. Use the property as their sole and primary residence.
2. Complete the purchase within no more than 9 months of issue of the award letter received from the relevant Housing Association in a successful application for FHF.
However, it is important that in addition to the benefits which attracted you to FHF in the first place, which perhaps either facilitated the purchase of the property or made the purchase more affordable than it might otherwise have been, you should understand the detail of the scheme.
Innes & Mackay guide to the First Home Fund:
This Guide is intended as a practically relevant summary and a brief explanation of the FHF legal documentation which will require to be signed by you before the FHF funds can be requested from the local Housing Association operating FHF on behalf of the Scottish Government.
Minute of Agreement
It is intended to help you understand the main points regarding the legal contract you are about to enter into with the Scottish Government. However please carefully read through the full versions of all the FHF legal documentation and advise us immediately if there are any points which concern you in respect of the FHF legal documentation or which require further clarification or explanation.
In terms of FHF you are required to enter into a Minute of Agreement with the Scottish Ministers. A copy of the style of Minute of Agreement which you will enter into is attached for your information. Please read over the terms of the Minute of Agreement and bring to our attention any matters which require clarification or which are of any concern to you. The main points of the Agreement are as follows:
Obligations to Pay – compulsory repayment of Scottish Ministers Contribution
Should you wish to sell your property on the open market you are required to notify Scottish Ministers as soon as possible and provide them with a copy of the Home Report which you have carried out. You are required to ensure that the Open Market Conditions, as set out in Clause 1 of the Agreement, have been complied with. Upon completion of the sale of the property, Scottish Ministers require repayment of their proportion of the Actual Open Market Value, as set out in Clause 1 of the Minute of Agreement.
There are of course other events which trigger repayment of the Scottish Ministers Proportion. These are known as Payment Events and are detailed in Clause 1 of the Agreement. You should carefully read over the various definitions of Payment Events and bring to our attention any items which are of concern to you or which require clarification. Should any of these instances occur, Scottish Ministers are entitled to instruct a Valuer to determine the Deemed Open Market Value, as set out in Clause 1 of the Agreement, of the property and calculate the amount due to them. They will then issue you with a Payment Notice and you will have 7 days from receipt of the Payment Notice to make repayment of the amount due.
Generally, a transfer to or between spouses (including same-sex marriages), civil partners or cohabiting couples would not trigger repayment to Scottish Ministers.
Obviously, the most common type of a Payment Event which you are likely to encounter is if you sell the property, whether on the open market or by private off-market sale.
Examples of the other less common Payment Events are:- any transfer other than sale eg. on death, or in the event of a joint property purchase, the second death; ceasing to occupy the property or renting without consent; remortgaging without consent; being under threat of repossession; default under the agreement; provision of false or misleading information when applying for FHF and acquiring an interest in any other property.
In the event that you are issued with a Payment Notice by The Scottish Ministers and fail to pay the amount due within the time specified, Scottish Ministers reserve the right to charge interest on the amount due from the date it became due to the actual payment date at the rate of 2% per annum above the Royal Bank of Scotland plc base rate.
Tranching Up – reducing Scottish Ministers Proportion
You are entitled to reduce the Scottish Minister’s proportion at any time providing that you comply with your obligations and abide by the terms of the Agreement and Standard Security. You are only permitted to reduce Scottish Ministers Proportion by a minimum of 5% of the Deemed Open Market Value at any given time. To reduce the Scottish Ministers Proportion you are required to serve a Reduction Notice as specified in Clause 3.2 of the Agreement and repay the proposed amount within 3 months of serving the Reduction Notice.
You are required to meet the expenses of registration of the FHF legal documentation with the Registers of Scotland. This includes registering the Minute of Agreement = £10.00, Ranking Agreement = £60.00 and Standard Security = £60.00 – Total = £130.00. You will also be required to pay any costs and expenses incurred by the Scottish Ministers in relation to any Payment Events or any expenses incurred in relation to you reducing Scottish Ministers Proportion.
Interest and Losses – depletion in Value
As well as benefitting from any increase in the Actual Open Market Value or Deemed Open Market Value (whichever applies depending upon the nature of the Payment Event) Scottish Ministers also “take the hit” in relation to any decrease in the Actual Open Market Value or Deemed Open Market Value, unless the decrease or depletion is a result of you breaching the terms of the Minute of Agreement, Standard Security or Ranking Agreement eg. failure on your part to properly maintain and/or insure the property, resulting in loss – Clause 6.2.
Generally, interest is only applied on any payment due to Scottish Ministers once the payment falls due and remains unpaid, otherwise FHF is essentially an interest-free loan.
You cannot assign, transfer or novate your rights under the Minute of Agreement eg. sell or transfer the property, whether on the open market or otherwise for, say, 80% of the valuation figure and have the new owner enjoy the same benefits as you have done under the Help To Buy Scheme. This also means you cannot leave the property to your children and have them inherit the same arrangement with Scottish Ministers as your eligibility for FHF was assessed based on your own personal and financial circumstances at the time. Scottish Ministers can, however, sell the debt on and divulge any information they wish in the process of doing so. They will, in effect, have a substantial mortgage portfolio across the length and breadth of Scotland and could choose to off-load that at any time, whether in whole or in part, without your knowledge or permission. However, it is perhaps less likely, given the potential political fall-out, that the Scottish Government would seek to sell on their right to the debt, as opposed to a private developer selling on their own Shared Equity portfolio accumulated pre-FHF.
You are not permitted to make any additions or improvements to your property which may increase the property`s value without the prior written consent of Scottish Ministers. You are effectively discouraged from carrying out any Permitted Improvements to the property as the Scottish Ministers would prefer you to utilise disposable funds so as to reduce or repay in full the Scottish Ministers Proportion. However, where there have been Permitted Improvements which have a Permitted Improvements Value, then they are taken into account when the property is sold or a Payment Event-triggered so that Scottish Ministers do not share in the Permitted Improvements Value. Please note that unauthorised improvements could benefit Scottish Ministers and entitle them to share in any resultant uplift in value.
The Standard Security is the legal charge which will be registered against your property to ensure that should you sell or transfer the property, Scottish Ministers are guaranteed repayment of their entitlement under the Minute of Agreement as you would need to repay their entitlement in order to clear the charge from the property as an integral part of any sale or transfer. The Standard Security effectively underwrites your personal obligations under the Minute of Agreement being making those obligations a secured debt against the property. A copy of the Standard Security is attached for your information. Please read over the terms of the Standard Security and bring to our attention any matters which are of concern to you or which require clarification.
We also enclose Explanatory Notes on the legal effect of signing a Standard Security in Scotland for you to sign and return. This not only applies to the Standard Security which you will grant to the Scottish Ministers but also to the Standard Security which you will grant to the Primary lender.
By granting the Standard Security in favour of the Scottish Ministers you are also confirming that you will maintain Insurance against loss or damage to the property for the full reinstatement value. You must ensure that Scottish Ministers interest is noted on the Policy and that any excess does not exceed £100. A list of the risks to be insured against is provided in clause d(ii) of the Standard Security. Please note that we are required to produce a copy of your Buildings Insurance Policy to the Scottish Ministers agents and we would be grateful if you could forward this to us as soon as possible.
Ranking of Agreement
There is a further agreement which you are required to enter into with both Scottish Ministers and your Primary Lender. The Agreement is known as a Ranking Agreement and in essence, ensures that the Primary lenders Standard Security will be given priority over the Scottish Ministers Security in the ranking of debt against your property. A copy of the Ranking Agreement is attached for your information. Please read over the terms of the Ranking Agreement and bring to our attention any matters which are of concern to you or which require clarification. The main points for you to note are as follows:
You are not allowed to grant any further charges over the Property without the written consent of both the Scottish Ministers and the Primary Lender.
You are consenting to the Scottish Ministers and the Primary Lender providing information to each other regarding you and your affairs.
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