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Is the government's help to buy scheme doing more hard than good?

A look into the main issues surrounding the government's help to buy scheme.

by Felipe Rosario

Why the government’s help to buy scheme is doing more harm than good for first time buyers.

A few years ago David Cameron and George Osbourne decided they needed to do something about the very obvious problems the United Kingdom is having with a shortage of affordable homes for first time buyers which has been the concern of many young people for a long time now.

There are several key issues which is wrong with the government’s help to buy scheme which I will be going through in some points below and also some suggestions which I think will be much better suited to assist first time buyers to be able to afford homes.

The primary issue with the help to buy scheme is that in my opinion that these homes are simply not affordable when compared to exisiting homes in the area. I understand that people purchasing a brand new home you will be paying a premium for being the first owner of that home (which I will be going through later).

If we look at a few examples I’ll show you how much of a premium we can see on these properties.

A 1 bedroom apartment is currently being sold in Catford for £357,000 which is being sold through barratt homes, which is almost £80,000 more for the average flat in Catford of 2 bedrooms (1.8 to be precise), as can be seen by the aggregate of sold house prices in the area aggregated by Zoopla as can be seen in the diagram below.

That is an incredible premium on the home property at about 22 – 25% premium when compared to existing homes which you could argue a very large amount of it is gone the second the new owners move in similar to buying a new car and having it lose instant value the second the owners drives it out of the car dealership. The other benefits of an existing home is that you are able to renovate and add value to the home such as adding an extension or a loft conversion and according to studies most people prefer existing homes to new homes by a wide majority.

It may not be that they will lose all the premium however I certainly thinks it’s enough to make them go into negative equity in their home when you consider the fact that many of the home buyers will be only putting down a 5% deposit.

In this home for example a deposit of £17,850 which is only a quarter of that premium, which may ultimately lead young people who have never bought a home before to be saddled with potentially negative equity not allowing them to move homes and get a fair price in comparison to what they paid for it if they need to.

This is just one example which I chose at random I am sure there are several others.

Now this is just one part of the help to buy scheme to purchase new homes however the mortgage guarantee allowing first time buyers to buy existing homes with a 5% deposit is in my opinion slightly better but it’s still not ideal.

I think that a 5% mortgage is fundamentally flawed for a few reasons the first is that it seems very close to what we saw in 2008 during the financial crisis with homeowners with homeowners buying homes they fundamentally cannot afford. The interest rates at which they are also offered are incredibly high as high as 4 – 5% which is significantly higher than 1 – 2% interest rates. This is a huge difference when you are paying off your mortgage month to month.

If you are borrowing £400,000 for example will cost you £1,508 for a 1% mortgage; £1897 a month for a 3% mortgage and £2,339 for a 5% mortgage which is a difference of £831 per month.

In comparison to the greater number of homes sold in the UK compared to those sold through the help to buy scheme it is a small number in comparison however what this has done is again bring up an interest in low Loan to Value mortgages we have begun seeing other 5% mortgages outside of the help to buy scheme.

I think that ultimately the government had very good intentions however when you look at the facts laid out in this article it is easy to see what the issues are with the help to buy scheme.

The main issue for most first time buyers is putting together enough money to put down a deposit and to pay for stamp duty. The governments in it’s last budget changes has brought stamp duty reform bringing in a tiered systems however I don’t think it goes far enough to help first time buyers.

The first thing I think they could do is to raise the threshold on stamp duty for first time buyers to a level where a first time buyer purchasing an average priced home in their region for example in London it could be as high as £400,000 allowing to them to save a potential £10,000 which they can add to their deposit to potentially get slightly lower interest rates and help from sliding into negative equity.

I also think another thing they can do is incentivise banks to offer lower interest rates to first time buyers by offering them lower than normal interest rates similar to what they are doing with the equity loan. I understand that they need to balance out the needs of the nation with the needs of first time buyers however I think this could be more beneficial to first time buyers in the long run making it affordable for people to get on the property ladder.

I think that the very least that they can do for new homes is to ensure that they are within5 - 10% of a similarly priced home in the same area bringing down the risk of negative equity.

This article was written by Felipe Rosario at Just Loft Conversions.

*This post was published according to the "Contributed Article Terms and Conditions"

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