The Help to Buy Scheme - what is it and does it work?

June 27th 2013

 

In April this year the government launched part one of the Help to Buy scheme, which aims to assist buyers purchase a new-build property by boosting their deposit by as much as 20% of the property value.

Whereas previous schemes assisted first time buyers, this scheme is open to current homeowners,

too. This has led to criticism in media, suggesting the scheme could artificially inflate the market.  

 

How does the scheme work?

The Help to Buy scheme will be launched in two parts:

 

The Loan Scheme - launched 1st April 2013

Equity loan interest-free for first five years limited to new-build properties up to £600,000.

With a 5% deposit of the property value buyers can borrow a further 20% interest-free from the government. The equity loan remains interest free for five years, at which point an annual fee of 1.75% kicks in, with an annual increase of 1% above RPI. The maximum equity loan amount will be £120,000. Mortgage payments for the 75% are due as normal and the equity loan must be repaid when the mortgage is paid off or when the property is sold.

 

The Loan Guarantee Scheme – from Jan 2014

Available for both new and resale properties, like part one this loan scheme will be available to existing as well as current homeowners.

The government guarantee up to 15% of the mortgage loan, similarly with a 5% deposit.  Details of the scheme are still unclear but will be announced later in the year.

 

Is the scheme a success?

It is still very early days yet, but as of the 6th of June 2013 four thousand buyers had reserved or purchased homes through the scheme. (The Guardian, June 6th)

We can only comment on part one of the scheme at present. In principle, helping first time buyers get onto the ladder is long overdue, but, as the scheme is open to existing homeowners, this may have wider implications for the market as a whole.

 

There have also been suggestions that some developers have been selling properties at overinflated prices to inexperienced buyers desperate to get on the ladder, but this is difficult to quantify.

The main risk when buying a new build property is that you often have to buy ‘off-plan’ which means you don’t know what you are getting until you complete.  This is not such an issue when buying a rental investment, which makes up a large proportion of London developments, but if you are buying a home it’s a very different type of decision.

 

The one major drawback for anyone considering the scheme is the restriction for sub-letting.  With people living such transient lifestyles nowadays, it is unrealistic to expect owners to sell if they need to move overseas for a year or out of London. This restriction attempts to deter abuse of the scheme but enforcement will be another matter in itself.  

 

What effect will this have on the market?

It is understandable how the scheme could help subdued parts of the UK property market where the market has remained flat, or negative, for several years. However, the government may have underestimated the chasm that exists between London and the rest of the UK’s property market when planning the scheme.

 

Help to Buy was pitched by the government to help buyers with larger deposits, increase mortgage lending and ‘kick-start’ the ailing housing market. Having grown by more than 15% per annum consecutively for the past three years would suggest the market is doing fine without help from the state.

 

As for Help to Buy part two… let’s wait and see. :)