Why I Don’t Like First Time Buyer Schemes Like New Buy!
The UK housing market seems to be in a very funny place at the moment. We have historically low interest rates, yet few buyers! We also have a glut of houses on the market but sellers are still reluctant to drop asking prices as most of them have mortgaged up to the hilt & can’t afford to sell. This has left those charged with getting the housing market going again with a real predicament. One intended solution that has recently been introduced is the government backed New Buy scheme.
The New Buy scheme allows developers and the government to join forces to help buyers secure a mortgage. I’ve seen many schemes like this in my time working in finance and I feel it’s important that people understand the potential pitfalls of these schemes so they don’t get caught out in the future!
If The Government Is Involved Something Is Wrong
It seems like common sense to me that if the government or developers themselves are having to lend professional couples money so that they can afford to buy their own house, something is wrong with the housing market. We have the lowest interest rates in modern times yet people are still struggling to buy a house! In the not so distant past it was normal practice for the majority of lenders to lend 3 times income on a mortgage, yet even with the recent drop in UK house prices many buyers are still having to borrow 4 or even 5 times income to be able to buy a house, and that’s if they can even get a mortgage. I feel Government Schemes like newbuy only serve to prop up an unsustainable market, allowing people to buy houses at prices that are above the true market value. I would also be asking myself what will happen to house prices if things don’t improve in the market and the government funding is withdrawn?
Tied to certain lenders
Another thing I don’t like about government first time buyer schemes like New Buy is the limited choice of lenders who are willing to participate. This limited choice of lenders can cause small problems now, but more importantly it can cause big problems in the future. It can cause problems now because the mortgages on offer for the New Buy scheme are often at higher interest rates than those available for a standard mortgage. I say this is a small problem because if you can afford the mortgage on offer and it’s a fixed rate mortgage then all being well you should be able to afford the mortgage until this fixed rate ends. It’s at the end of this fixed rate period that you could run into big problems. A lot of government mortgage schemes tend to have a big flaw because they are often short term schemes.
When I was working as a mortgage advisor I remember the day my boss came into my office and dropped a large pile of files on my desk asking me to ‘sort these out’! When I looked into them they were all first time buyer Halifax shared ownership mortgages that had been completed about 3 years previously on new build properties. The reason we couldn’t do anything with them is that most lenders had stopped lending shared ownership mortgages and those that would lend had changed lending criteria massively. This was a big problem because the fixed rate period on these mortgage loans had ended, the interest rate payable had jumped dramatically and the borrowers could no longer afford the payments. I would say that 75% of those borrowers were repossessed because of this.
You may be able to get a mortgage for the New Buy scheme now but there are no guarantees you will be able to remortgage easily in the future if lenders pull out on the scheme.
New build houses are susceptible to price shocks
Another problem with schemes like New Buy is that they are often limited to new build houses. During the recent financial crisis many new build housing developments have been hit hard when it comes to house prices. This is bad enough in itself but if you’ve bought a house that might already be worth more than its true market value you could find yourself in negative equity if house prices suffer further in this financial crisis.
Interest Rates Won’t Always Be This Low
Schemes like New Buy are also tempting people to spend more than they might be able to afford at a time of historically low interest rates. Mortgage interest rates are still low at the moment even though there is a relative lack of mortgage funding. This is due to the cheap money that is being made available to the banks. This cheap money won’t be available forever though and who knows where interest rates might go when funding dries up.
The Crisis Is Far From Over
Finally I feel that the UK economy and housing market is still very susceptible to financial shocks from inside or outside the UK. If you ask many professionals where they think UK house prices are heading they will likely be unable to give you an answer with conviction. It’s still a risky time to be buying a house so make sure you’re comfortable with the risks of buying a house using a government backed scheme like New Buy.
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