Government backed ‘Help to Buy’ scheme brought forward 3 months
The announcement that the government backed Help-to-Buy scheme has been brought forward by three months is music to the ears of the still-at-home generation. For years now, the housing market has been virtually inaccessible for those on an average wage. Some statistics were released a few years ago, which told a grim tale about how many years a couple earning £25,000 per annum each would have to save for before they had enough money for a deposit alone. Renting, particularly in the South of England, is becoming increasingly expensive, and making it almost impossible for those having to rent to save for a deposit.
This new government scheme, is being rolled out just as critics are claiming that the coalition may not be in existence by the next election. This explains why it is being launched now, rather than in January, the original launch date. If Cameron & co can win the support of the public, then it may boost the coalition’s chances of survival.
However, if something sounds too good to be true, it probably is. The scheme will allow buyers to purchase a home up to the value of £600,000, with a deposit of just 5%. The government then provides an equity loan of 20%, which is fee free for five years. The buyer must secure a 75% mortgage from one of the participating banks. This means that while the deposit is small, the first time buyer actually accrues large debts. This poses the question about how affordable this scheme really is – after all, if people are struggling to save large deposits, how able will they be to afford to repay both loans? The other important question to be raised is how many borrowers can actually pass a credit check these days, or even know what their credit score is?
Creditworthiness is calculated according to each individual lender’s specific criteria, and it’s important to remember that the main reason for a company’s existence is to make money. This means that perfect borrowers who always pay off debts instantly are not always the most popular, as they do not pay as much interest as those who take longer to pay off debt. Borrowers are always advised to check their credit report before applying for a mortgage, as not checking can actually damage chances of being accepted. To understand more about credit scores and lending criteria, read this article, courtesy of credit comparison site Totally Money.
Critics are wondering whether this new move will create a new housing bubble, at a time when the housing market is showing signs of recovery. Personally I’d have to agree with their skeptical view. I’ve voiced my concerns before on Money Bulldog about shared ownership/loan guarantee schemes and I stick by those concerns. I feel that buying a house should be an option available to all hard-working families but I also feel that keeping house prices artificially inflated with schemes that allow people to borrow much more than they perhaps should be borrowing will only hurt the home buyer over the long-term. I also don’t think that encouraging people to over borrow at a time of historically low-interest rates is such a good idea either, what happens when rates rise and they have to remortgage?
On that note I have to recall an experience from when I first started working as a mortgage broker what seems like many years ago. In my first week I was handed a pile of mortgage files that were due to be remortgaged, they were all shared ownership (I know Help to Buy isn’t strictly shared ownership but the principles of this example still apply). Unbeknownst to me the more experienced brokers in the office had all failed at finding a lender to take them on because many lenders had pulled out of the shared ownership market or altered their lending criteria, so they thought it would be amusing to let me sweat on a thankless task for a while, pick on the newbie hey! The point is that these mortgages had all come to the end of their fixed term and as a result the rates were due to increase to unaffordable levels for many of the borrowers. The problem was that these borrowers now had nowhere to go and many of these homes ended up getting repossessed. One little saying I’ve been pondering over a lot recently is this ‘Just because you can do something, doesn’t mean that you should’. I’m sure you can see the application. Just because it’s possible to buy a house, doesn’t mean that you should.