New Buy Scheme

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be asking myself what will happen to house prices if things don’t improve in the market and the government funding is withdrawn?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.

Do You Have A UK Mortgage Related Question? Speak with an advisor today

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8 Responses to Why I Don’t Like First Time Buyer Schemes Like New Buy!

  1. It sounds like what’s going on in the UK is very similar to what’s happening here in Vancouver. Prices are so high but no one is buying, but people are reluctant to lower their asking prices because they have huge mortgages and need the money from their sale to stay in the housing market. It definitely makes me happy that I’m just renting right now. Less stress!

  2. I was so lucky when I sold mine just in the nick of time. The lady who bought my house has tried to sell it but can’t. Me mum and dad have a few houses they thought of selling but why bother they said. No one is buying they would lose money so they rent them out as they are paid off. No one wants to buy and yes the rates are so low. The other thing I notice is that we pay so much money to estate agents here in Canada it blows my mind. I got out when the going was good but now like you mentioned there are so many on the market because no one has the money to buy yet they get loans that they will until the dawn of time. -Mr.CBB
    Canadianbudgetbinder recently posted..Reader Question:Is It Savvy To Cash In My RRSP’s To Pay Off Debt?My Profile

  3. If you need a gimmick to afford buying a house, you probably shouldn’t be buying a house. Look at all the foreclosures in the US as a prime example.
    Kim@Eyesonthedollar recently posted..Inspired by Malala Yousafzai, 14 Year Old HeroMy Profile

  4. Pauline says:

    I bought in 2009 in the UK via shared ownership and I agree with you that if the government is involved, something is wrong. I couldn’t afford to buy the whole flat on what was otherwise a good salary. I know that the price of my flat was inflated, but I was still paying less than when I rented a similar property, so I didn’t mind too much since part of it was going to build me some equity. Hopefully people can still pay their mortgage when the rates go up. I have a lot of breathing room but I think that will take time and by then people should have a raise at work and be able to afford the monthly payments.
    Pauline recently posted..Moving abroad: The Check-listMy Profile

    • I’m glad you’re in a strong position pauline. I just worry for those who might be stretching themselves assuming that house prices have hit a bottom and are used to living on low rates. Even more I don’t want people to get trapped in a house they can’t afford to sell due to negative equity if house prices were to drop further, even by 5%.

  5. Matt says:

    I think prices will remain static for a while, because, as you rightly point out, no-one can afford to sell for less. The danger is there’s a mortgage “bomb” that needs handling carefully by the banks and government.
    As you point out, rates are low, what with the UK base rate at 0.5% they can’t get any lower, so it does mean rates will increase, and while some people can afford payments now, what about when they rise significantly??
    When I got my first mortgage, I was paying 6% and thought I was lucky!!
    Given time, mortgage balances will decrease from continued payments, so the market will soften a bit, and rates will go up, (they can’t really go down from 0.5% base rate anyway!), which may force some people’s hands to sell for less, but then again, at 4 or 5 time income higher mortgage rates just won;t be affordable for most.
    Matt recently posted..Payday Loans – Are They Ever Worth It?My Profile

  6. Jason Clayton | frugal habits says:

    The Truest Statement I’ve Read All Week:

    If The Government Is Involved Something Is Wrong

    Amen to That.
    Jason Clayton | frugal habits recently posted..Five Ways to Help your Kids Learn about MoneyMy Profile

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