The UK Government recently announced that it is launching a scheme to help First Time Buyers on to the housing ladder. It also is aimed at stimulating the building industry. First Time Buyers are to be given 95% loan-to-value mortgages for properties in new-build developments that are covered by the scheme. In turn, the government is guaranteeing to the lenders (who would not normally lend 95% to such buyers) that if the property is sold for less than the amount of the mortgage, they will cover the shortfall. So, dear reader, how will this help you?
If you live in Scotland, the answer is…no! For a start, the scheme is only for England as housing is an area reserved for the Scottish Parliament.
If you’re thinking of moving to England, or you are indeed English, do I think the scheme is a good idea? And do I think that the Scottish Government should attempt to replicate it up here? Again, it’s a short answer…no! Why not?
It seems to be a scheme that ignores the very factors that are causing the property market to fall and one that entices young people in to negative equity situations. The ultimate beneficiaries are the house builders and lenders. The house builders get to shift huge amounts of stock to people who would otherwise be unable to purchase a property. If the buyers then can’t pay their mortgage and the price that the property is sold for is less than the amount of the mortgage, the lenders are protected. In return, the government gets the love and favour of the building industry and creates jobs. And the banks, who were given huge amounts of money that was supposed to be used for lending to businesses and private individuals, get to lend to people who they would normally consider to be too big a risk but who don’t really pose a risk now if the government underwrites the loan.
And what do First Time Buyers get in return? Well, let’s say that a 5% deposit amounts to ยฃ10,000 and then the costs of purchase (solicitors etc) are about ยฃ1,000. In return, with a 95% mortgage they buy a property that costs ยฃ200,000. So they sink ยฃ11,000 into that property. Because it’s a new-build, it will almost certainly be worth about 10% less, at least, as soon as the key turns in the door because all of the things that make a new-build attractive (brand new smell, picking your fixtures and finishings etc) are no longer so attractive once it’s second-hand. So they’re immediately in negative equity. With a huge mortgage that they have to service. And will the buyer have been able to negotiate hard with the builder to get a real discount that reflects the fact that it’s a buyer’s market at the moment? Probably not because of this scheme.
In short, I think it’s a disaster waiting to happen. It seems to me that the only possible losers in this situation are the poor first time buyers whose precious savings and deposits are being sacrificed for the benefits of getting the building industry moving and lenders making risk-free interest on the mortgages. I hope that I’m proved to be wrong.
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