The right to shelter has been a UN-sanctioned human right since 1948, but in these post-recession years of rocketing house prices, stagnant incomes and financial insecurity, for many first-time buyers owning a house seems more like an unobtainable fantasy than an achievable goal. With house prices 60 times higher than they were fifty years ago, many young people and lower income families could be forgiven for praying for a housing crash – and yet this same demographic are being targeted by the government’s Help to Buy equity loan scheme, which will, should they choose to use it, see them heavily out of pocket should this market crash occur. So is the government’s new scheme really in the best interests of those who can’t afford to buy given the current system or is it, as many of its detractors are claiming, a foolish scheme which could result in a second subprime mortgage crisis? Is encouraging low-income earners to borrow huge sums of money really responsible? And how does the scheme work, anyway?
The government currently offers two Help to Buy equity loan schemes: a standard scheme, where the government lends up to 20% of the cost of your home, meaning you need a 75% mortgage and 5% cash deposit to make up the rest, and a London Help to Buy scheme, where the government lends up to 40% of your home’s value, in line with London’s higher house prices. The scheme is valid only on new-build houses (we’ll come back to that in a minute) and houses must have a value of up to £600,000 to be eligible. You then make monthly mortgage repayments as usual, and also pay a nominal management fee of £1 per month. The government loan is interest free for the first 5 years, after which you’ll pay 1.75% per year on the outstanding amount of your loan, plus any increase in RPI plus 1% after five years.
Well, for a start, it’s a risky venture to borrow so far beyond the scope of your income. There’s no doubt that the scheme has shaken up the market somewhat, with rates for first-time buyers having fallen almost 1% when compared to last year and first-time buyer purchases up 11%, but with more than a quarter of buyers signing up for a 35 year or more mortgage, are people falling back into the old trap of “borrow now, default later”? Not to mention the risk of falling into negative equity should house prices fall – and considering that the scheme applies only to new builds, which depreciate in value very quickly, even if the market continues to increase, buyers seem at risk of losing out. Under the government’s scheme they own part of your house, meaning if you sell it, you must repay their stake. If prices should drop rather than increase, it could be almost impossible to claw together the equity needed to upgrade to a new house.
When you’re considering something as momentous as purchasing your first property, there’s no doubt that you need to carefully think through all available options and shop around for the right option to suit you, not be seduced by time-limited offers or high-debt schemes.
It’s an unfortunate reality of the world that the long-term intricacies and benefits of financial offers are not always apparent. This is a market that is inherently vulnerable; the inexperienced and those with few options. The lack of sound financial advice available to these parties could land them in a situation they cannot navigate with ease. While Help to Buy will certainly be beneficial for some, it’s far from a “one size fits all” system – so make sure you do your research, seek advice, and consider the long-term implications of any large loan.