The budget of 2011 has made attempts to stimulate demand for properties by introducing two new measures. Firstly, it has changed the rules with regard to stamp duty for buy to let investors that purchase multiple properties. For some could reduce the stamp duty they pay. For example; any one buying a hundred homes at £200,000 each currently pays the top stamp duty rate of 5% on the £20 million deal, therefore paying £1 million stamp duty. New proposals would ensure that the average price of the properties is used for stamp duty purposes, so each property will be charged a 1% rate of £200,000, making £2,000 multiplied by a hundred, so only £200,000 will be paid rather than the £1 million previously. These new rules may appear to have little relevance for most people. However, as insurance companies and pension funds deal in these numbers it could give a boost to the market, that will hopefully filter though to higher prices. The insurance company Aviva has already confirmed that they are considering setting up to a billion pound residential property fund to take advantage of the new tax break.
Secondly, it has introduced measures that are more significant in the short term, as they are aimed at assisting first time buyers. The schemes purpose is a shared equity scheme that will benefit from a £250 million pledge from the government that hopes to help at least ten thousand first time buyers in the next year who earn less than £60,000 per annum. To qualify, buyers must have a deposit of only 5% and purchase a newly built property, with the government and house builders putting in 10% each through an equity loan. This will enable the first time buyers to qualify for a 75% loan to value mortgage. The equity loan portion is interest free for the first five years, with interest charged at 1.75% in year 6 and thereafter, inflation plus 1%. Typically house builders and the government will have their 20% stake returned when the house is sold. If the value of the property has risen the debt will have increased. For example, if a £20,000 (20%) equity loan is received from the government and house builders on a £100,000 house, which later sold for £120,000, the 20% portion will have risen to £24,000.
The governments £250 million is to be paid for by a levy on the bank so it is to be welcomed that the initiative is not being paid for by the tax payer. Also, the scheme will help some first time buyers to realise their dream and to get their foot on the housing ladder, and buying a brand new property with low maintenance in the early years. Although it has been acknowledged that the help provided has been described as modest, helping only around 4% of first time buyers, for some it could be a step in the right direction.
Personally, I find it troubling that the scheme is not extended to first time buyers buying second hand properties. Unfortunately this scheme will not generate further transactions and get the market moving. The chain will end with the first time buyer. Also, I am concerned that within the last five years new property prices have declined by up to 20% in some case, and if this trend continues it could be that the scheme is just storing up trouble for first time buyers. In addition, there are also the added complications of managing an inflation linked loan in the future, on current inflation rates it will be a lot more expensive than most tracker rate mortgages that are available today. It also needs to be noted that the assistance being given severely restricts the ability of the buyer to move much further up the ladder in the future if house prices rise, as the government and the house builders will have taken their 20% share of the profits.
However it is quite possible that lenders, because of issues mentioned above may be reluctant to embrace the scheme. They may instead grit their teeth, and rather than offend the government, introduce 95% full ownership schemes themselves and open up the market on their own terms. So the ending could be a happy one for all concerned with the pent up demand from first time buyers supporting the housing market in both new build and second hand markets.
Whether you are a first time buyer or 2nd time buyer it pays to take independent mortgage advice to help you take the right route to home ownership and to ensure that the house of your dreams does not turn into a nightmare. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com.
Kieron Bassett CertPFS
4th April 2011
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