The help to buy scheme has been much lauded, and criticised. However, as usual there is a lot of smoke and mirrors around the scheme.
So, let’s try and establish a few facts about the help to buy scheme.
- Several high street banks are part of the scheme, not every bank is part of it
- The scheme will provide Help To Buy Mortgages where the loan ranges between 80% to 95% of the property value
- Mortgages up to £600k are eligible
- The buyer would only need a 5% deposit
- The government and the bank then jointly guarantee up to 15% of property value, in return for a fee paid for by the lender
- The government will let lenders start agreeing loans now, with the loans going into the scheme when it formally launches in January
- Only repayment mortgages are part of the scheme
- No second homes or buy to lets
- Stringent affordability checks will be required and the government may seek how the lender verified the income
- No self-certs
- Clear credit history will be required
What Does This All Mean?
The big thing here is not to confuse what the scheme is doing, get it straight that the scheme;
- Is not easing lending criteria
- Is not making mortgages easier to obtain for everybody
The Help To Buy Scheme is about providing the lender with the confidence to lend a higher loan to value percentage. You still need to have a decent credit record and proven affordability.
Will House Prices Go Up?
This is always said in the context of it being a bad thing. If you own your own home then seeing prices go up makes you feel better, a little warm inside. It then provides confidence and consumer spending increases.
This means that the money cycle speeds up and the economy gets stronger.
The downside is that house price rises make it harder for first time buyers.
Will the Help To Buy Scheme cause house prices to rise. In our opinion, not in isolation it won’t.
There is a parallel here. Businesses have been able to utilise the ‘Enterprise Finance Guarantee’ for many years. It operates in a similar way, giving guarantee to the lender when they advance to businesses.
The EFG scheme suffered as the government became concerned with the level of pay-out on guarantee claims. The lenders started to back away from the scheme due to administration and having an unknown level of risk. In other words, they could not be certain the government would pay out on every claim they made.
There are parallels with the Help To Buy Scheme.
The interesting part will be to see whether it works, or suffers the same fate as the business EFG scheme and becomes the next financial white elephant.
By David Farmer
Ref – Please see the official government post here
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