Much has been made of the government’s Help to Buy scheme, with past criticisms coming from the mouths of Business Secretary, Vince Cable and departing Governor of the Bank of England, Mervyn King. The incoming Governor, Mark Carney, has indicated that the scheme will not continue beyond its initial three year period if it starts to threaten the stability of the UK economy by creating a house price bubble.
But what is the scheme, and why has it caused controversy?
The scheme was initially made up of two distinct elements, the first of which was rolled out in April 2013, and the second of which was due to commence from January 2014, but was actually brought forward by the government to October 2013.
The scheme is made up of a number of different options, including an equity loan, mortgage guarantee and shared ownership.
Help-to-buy equity loan
The equity loan scheme enables first time buyers and movers to secure a government loan of up to 20% of the total purchase price of a new-build house with a purchase price of up to £600,000.
The property must be purchased for use as a primary home (so no sub-letting permitted) and the purchaser must contribute at least five percent of the price, with the remaining 75% typically being met by mortgage finance.
The purchaser pays no fees on the government loan for the first five years, but from year six is required to make an initial payment of 1.75% of its total value. After that the annual figure payable rises in accordance with the RPI (retail price index) plus an additional 1%.
The fees are not offset against the loan, which is repayable after 25 years or on the sale of the property – whichever comes first.
It’s worth noting that the sum repayable is based upon the sale price of the house, meaning it can increase or decrease. For example, on a house purchased for £200,000 with a deposit of 5%, equity loan of 20% and mortgage covering the remaining £150,000; which later sells at £210,000 – the loan repayable would be £42,00 – an increase of £2,000 as per the higher sale price of the house.
Help-to-buy mortgage guarantee
This part of the scheme has been designed to increase the availability of high loan to value mortgage products. It enables mortgage companies to purchase a government guarantee of up to 15% of the mortgaged property’s value. The guarantee is provided to the mortgage company, not the purchaser and the purchaser will still be required to have a deposit of between 5 – 20% of the purchase price. The guarantee is available on properties with a purchase price of up to £600,000, which can be new build or existing.
To be eligible, potential purchasers have to pass affordability checks, must be purchasing the house to live in – which must be the only property they own (in the UK and abroad) – and the mortgage must be taken on a repayment basis (not interest only).
Help-to-buy share ownership schemes
We wrote about shared ownership help-to-buy schemes earlier in the year. You can read that post here.
In conclusion…
The aim of the help-to-buy scheme is to encourage the property market to start to move again, and enable eligible purchasers to secure the lower mortgage rates that are typically available to purchasers with bigger deposits. However, concerns have been raised that the scheme will cause a property bubble, which could in turn cause economic uncertainty – spelling out bad news for the UK.
Critics of the scheme point out that increasing house prices mean that first time buyers are actually no better off; as they are still required to find a hefty deposit. Based upon a UK average house price of £239,000 in May 2013 (an increase of £10,000 on the previous 12 months’ figures) – a 5% deposit is £11,950 – a huge sum for many people.
In addition, if a housing bubble is developing (and prices certainly are rising again), then it’s arguable that the scheme opens both those accessing the scheme, and the taxpayer, to unacceptable risk.
However, although it’s easy to get caught up in media rhetoric about the potential downsides to the scheme, it’s also important to remember that, for many, home ownership remains a distant dream.
On this basis alone, the government should be applauded for its initiative, which at least seeks to make home ownership a reality for a wider range of families, individuals and couples than was previously the case. It should also be hoped that UK banks and building societies learnt their lesson the first time around, and that they’ve tightened up their approval mechanisms for mortgage lending – particularly with regards to high loan to value transactions.
Assuming that this is the case, and that prospective purchasers are assessed properly, with checks and balances applied throughout the course of the procedure, then perhaps the Help to Buy scheme isn’t such a bad thing after all.
For more information and advice on buying a home, the Help to Buy scheme, buy-to-let property investments, or selling and buying residential property, please contact Gisella Alberici on 0161 0281, or by email: gisella.alberici@ratiolaw.co.uk.