The government has brought forward its second phase of its Help to Buy Scheme from January 2014 to starting right now. Briefly, the Help to Buy Scheme now being launched is not like the Help to Buy Equity Loan Scheme launched earlier this year.
The first scheme targeted first time buyers in particular buying new properties worth a maximum of £600,000. The deposit required was just 5% with the government then lending up to 20% of the value of the property interest free for 5 years. After this time borrowers pay an annual fee on the government loan amount of 1.75% that rises annually by the retail price index plus 1%.
Although the first scheme launched in April, the second scheme is more inclusive. The reasons for this are that they are available for all house purchases up to 95%, but also for so called mortgage prisoners. These are borrowers who for example, until now could not remortgage because of lack of equity. In theory 95% remortgages should now become freely available. The downside of this second scheme is that unlike the New Build Scheme, the government will not provide an interest free loan for the first 5 years. They will be merely guaranteeing the lender that they will take the risk of any loss between 80-95% of the loan. For example, someone who buys a property for £200,000 with a 5% deposit will therefore borrow £190,000 with the government/taxpayer covering 15% of the loan that equates to £30,000. This scheme aims to boost mortgage availability by reducing the risk for lenders because the taxpayer takes the risk of default.
Many industry commentators, and indeed, members of the government have been critical of these schemes that have recently been launched as they feel the housing market has stabilised and does not require high risk government intervention. These people question the wisdom of this housing incentive and potentially using taxpayer’s money to clear up the mess if the gamble does not pay off. Some of these concerns appear to, at last, have some impact on the government, and although the new scheme is starting early, it was originally supposed to run for 3 years. However, the chancellor has now decided that he’ll give the Bank of England the right to review the scheme on an annual basis starting in September 2014. It appears that the government is prepared to either end this scheme early, or if they are concerned, make the terms so onerous to the lenders, that they will stop lending on 95% mortgages. The actions the government have recently taken have lead to a very confused picture, and I can’t help thinking that the announcement to bring the second scheme forward is politically motivated. This announcement was made just before the Tory party conference and just after Labour has announced that if they were elected they would freeze energy prices. I believe the early announcement was made to enable the Tories to steal Labours thunder.
Putting aside party politics, we have to ask ourselves where this leaves the housing market. Undoubtedly, the government’s actions will stimulate the market in the short term. But I’d advise not to enter the market now unless you’re reasonably sure that you are buying with the long term in mind, as there is potential for prices to fall again in the near term, if the schemes end early. However, just like the Royal Mail floatation, I think the government would want to be seen in the first instance to be offering attractive rates on 95% mortgages, so for many, the message is to buy now while stocks last.
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
30th September 2013
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