The Chancellor of the Exchequer George Osborne has unveiled a 130 billion pound scheme to help house buyers that predicts 500,000 people will benefit from these state backed mortgages.
The scheme is known as Help to Buy and has two options. The first option is called Help to Buy equity loan and is available from April 2013, but only applies to new build properties. You only need a 5% deposit and then the government will lend you up to 20% of the value of your property through and equity loan. The first 5 years of this portion of borrowing will be interest free, and then after it will attract a 7.5% interest rate that will rise annually by inflation plus 1%. Crucially, this scheme is not just a first time buyer scheme but is available to all borrowers up to a property value of £600,000.
The second option called Help to Buy Mortgage Guarantee is similar to the first scheme in some ways as it available to all buyers with a 5% deposit, and the maximum purchase price is £600,000. But it differs in that the scheme does not start until January 2014, and is available for all houses, not just new ones. Also, there is no interest free loan as in the first option, but the government will give guarantees to the lender that if they lend 95% they will only be liable for the first 80% if it goes wrong. Although more details will be made available in this deal as time goes on, it is possible that loans could be available in this area for remortgages. This could help people who have little equity in their properties to be able to remortgage at competitive rates, as I assume lenders will be prepared to lend on remortgages to 95% when the government is unwriting potentially large losses.
The above schemes will run for 3 years but the reaction to the announcement has been mixed. On the positive side, house builders share prices jumped by as much as 7% after the announcement. In addition there has been much positive comment about this development providing a shot in the arm to the housing industry. Also, many people locked out of the market due to strict mortgage conditions with regard to underwriting and deposits, it has been predicted that they should now be able to access the market. The detractors are saying that the housing market was showing signs of stabilizing already, due to in part government initiatives that have seen borrowing rates tumble during the last 6 months. They say that the risks are too high and are reminiscent of a scheme run by the Americans to make houses more affordable. This was when the government set up two home loan agencies known as Fannie Mae and Freddie Mac. Unfortunately the US taxpayer had to provide 150 billion of support during the financial crisis just to keep these agencies afloat. In the UK a housing collapse according to budget documents would leave the British taxpayer having to support the scheme to the tune of 130 billion. To put this into context this is almost twice the amount that was required to bail out Royal Bank of Scotland, Lloyds and the Halifax.
Personally I feel that this artificial stimulus will provide in the short term a boost to the the housing market. But it could then bring us back to square one as prices inflate, and affordability then again becomes an issue, leading to prices falling, followed by a squeeze on lending. However, by then there would have been an election and this incumbent government would have benefited in the election from the feel good factor that a housing boom brings to the electorate.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
15th April 2013
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