New scheme for first time buyers announced by UK Government
This week, the Government announced a new scheme designed to help first time buyers.
The Prime Minister and Deputy Prime Minister say ‘The housing market is one of the biggest victims of the credit crunch… that lack of confidence is visible in derelict building sites and endless ‘for sale’ signs. It is doing huge damage to our economy and our society, so it is right for Government to step in and take bold action to unblock the market.’ The initiative has been greeted with a mixed response.
Triple problem in the housing market
Interviewed on BBC Breakfast, Minister Grant Shapps said ‘The problem that we have is that lenders aren’t lending, builders aren’t building and people can’t get their deposits together to buy, so we’ve got a triple problem in the housing market.'
New homes
The scheme is intended to tackle the problem in a number of ways. Its £400million ‘Get Britain Building’ fund, by which the Government will provide financing for housing projects, should encourage builders to invest in projects (including those that have stalled in the current economic climate) to build new homes. This should increase the stock of housing affordable to first time buyers. It is estimated that sixteen thousand new homes will be built as a result of these tax payers’ subsidies, which is far fewer than the estimated need, but nonetheless a welcome boost.
Deposits
Banks are demanding deposits of up to 20% from first time buyers these days. This, combined with huge hikes in property prices over recent years, has meant that for many first time buyers, raising such a large sum has not been possible. The Government’s scheme provides a guarantee underwriting the loan, which would allow lenders to offer 95% mortgages, leaving a more manageable 5% deposit for the buyer to provide up front.
Eligibility
These 95% mortgages underwritten by the taxpayer will only be available for new build properties, although there are other government schemes which will help in other cases (for example for council tenants to buy their properties – see also our guide for
First Time Buyers).
Note of caution
Anyone interested in taking advantage of this scheme (indeed anyone taking out a mortgage) should bear in mind that interest rates are at unprecedented low rates and have been for a very long time. The buyer needs to recognize that mortgage rates have long been expected to rise. Many commentators have pointed out the fact that first time buyers with Government support will not be immune to likely increases in mortgage payments, resulting in a danger that they are forced to default.
Negative equity
Similarly, many have suggested that the problem for first time buyers is simply that property is currently overpriced. They believe that prices will fall dramatically until it is affordable. The danger is that those who have bought may well find themselves with negative equity - where a property is worth less than the amount outstanding on the mortgage – and saddled with a home they cannot afford to sell. Some feel that first time buyers would be foolish not to take advantage of the Government’s offer; others believe that people should hold off buying until prices make a purchase more affordable.
Positive note
Perhaps unsurprisingly, the Government initiative was welcomed by builders. The executive chairman of the House Builders Federation said ‘This is a great deal for people wanting to buy a new home… This scheme will allow people to buy their new home on realistic terms and help in particular hard pressed first time buyers. It will also be a huge boost to house building. Since 2007, the biggest constraint on homes being built has been mortgage availability. This scheme will see more desperately needed homes being built, create jobs and give the economy the boost it needs’.