Many commentators believe that the Budget is largely a waste of time, and a waste of
money. By the time the Chancellor has taken money from one group and given extra
allowances to another, the net effect is relatively small in terms of the net gain in tax.
In our economy, the fact that London is the world’s financial capital means that a huge
amount of revenue is generated. Another huge driver of the economy is the housing
market. Any government will wish to see growth in both these sectors. It is the housing
sector which has seen the biggest downturn. Yet one of the big surprises of the budget
was the Chancellor’s announcement of a home buying scheme called Help to Buy.
What Is It?
Help to Buy will take two forms. One part offers buyers the opportunity to take an
interest free loan from the government. The other sees the government acting as
guarantor for some of a borrower’s debt. Both will be available for homes worth up to
£600,000 and there will be no cap on how much you can earn to qualify.
How does it Work?
The “equity loan” part will start on 1st April 2013 and will help people who want to buy a
new build property. It is similar to the existing First Buy scheme, but is available to
existing home owners as well as first time buyers. Borrowers will need to raise a
deposit of 5% of the value of the property they wish to purchase, but can borrow a
further 20% on an interest free basis. The biggest loan available will be £120,000.
The loan which will be provided by the government must be repaid when the property is
eventually sold. It can be repaid earlier, but only if the mortgage is paid off at the time.
After 5 years it will attract a fee of 1.75% which will rise annually by RPI (Retail Price
Index) inflation plus 1%. The Treasury say that the £3.5 billion scheme will help up to
74,000 buyers. Anyone who is interested in using it needs to contact a participating
house builder or Home Buy.
The Guarantee Scheme
This part of the scheme, which will be available from January 2014, will help you buy
either a new or existing property. Again, you will need to be able to raise a deposit of at
least 5%, but less than 20% (if you have a bigger deposit you should have a good choice
of mortgages anyway). The government will provide a lender with a guarantee for up to
15% of your loan, allowing it to offer a mortgage even though you have a small deposit.
Apparently more details will be announced later in the year.
The schemes will both be available to new buyers and those who own homes already,
but not people buying property to let. The aim is to help both first time buyers and those
stuck on the housing ladder. Because you will need a deposit of at least 5%, they will
not help if you are in negative equity. The mortgage guarantee scheme could be useful
to people who are trying to sell, as it will help buyers purchase existing homes – other
schemes have tended to focus on new build properties.
The criteria for the equity loan specifically rules out anyone using the scheme to buy a
second home, but the outline criteria for the mortgage guarantee element does not.
The chancellor has said that “the scheme is still being consulted upon”.
Can I Get A Mortgage?
If the only thing standing between you and a mortgage is the lack of deposit, then it
should do. If you have other issues – a poor credit history or you are recently selfemployed
for example – then no it will not help. Lenders will still be able to choose who
they want to lend to.
The government has left it to lenders to set their own rates on the mortgages they offer
through Help to Buy and it is not clear how much they will charge.
Mortgages offered through the guarantee scheme should in theory cost less than the
95% mortgages currently on the market, because the government is offering the lender a
guarantee. However, it is not clear how much the lender will have to pay for that
guarantee and how it will pass it on to the borrower. Rates on the existing New Buy
scheme, which includes a similar guarantee, are below 5%. However, the guarantee on
that scheme is paid for by the developers.
It is also unclear if lenders will be allowed to offer these high loan-to-value (LTV) loans
without ensuring that they have extra capital in place behind the scenes – a provision
which adds to the cost of loans.
Currently a lender has to hold 8 times more capital against a mortgage at more than
90% LTV than against a mortgage below 60% LTV. Barclays has managed to achieve
relief from this requirement for New Buy loans, but is the only lender to do so.
Help to Buy isn’t designed to help you if you fall into difficulty with your mortgage, so if
you fall behind on your payments you could still lose your property. The guarantee is
for a lender and means that if it does end up repossessing and is unable to recover the
money from you and/or the sale of the property, the government will step in and make up
some of the shortfall. The buyer can still lose their deposit and the lender will still be
able to lose up to 80% of the property’s value.
Will It Work?
Researchers believe that it will increase the number of first time buyers and second
movers who are able to buy homes. It is estimated that the equity loan scheme could
help 25,000 households a year over the next three years, while the mortgage guarantee
scheme has the capacity to enable 550,000 extra house sales in the next three years it
will be in place. However, it is said that it is unlikely that the UK will build all the homes
that it needs even with this scheme in place.
The Social Market Foundation has warned that the scheme will help keep “the housing
bubble inflated” and says older wealthy homeowners are the only winners.