With the news that David Cameron has brought forward the second phase of the help to buy scheme, potential buyers are now able to look at purchasing a new home before Christmas. As such, people hoping to take their first step on the property ladder can do so with as little as a 5% deposit.
First time buyers
The individuals looking to gain the most from the new incentive are first time buyers. In recent years, many people have expressed concern at their inability to raise the money for a deposit. With the average Greater London house price now pushing half a million pounds, a 20% deposit will leave potential buyers having to raise £100K, a figure, which for many, just isn’t viable.
A figure of 5%, however, will leave buyers having to raise around £25K and for many across the rest of the UK, that figure could be under £10K, which is around 40% of the yearly average national wage. With the average house price now being £247,000, the average deposit a buyer will have to raise will be £12,350 instead of the whole 20% which works out at £49,400, a figure which many first time buyers would find daunting, if not impossible.
How it works
While the deposit essentially remains the same, the government is guaranteeing the other 15% which will leave the risk to the lender the same. However, there is a fee attached, which is said to be up to 0.9% of the balance which will be charged to the lender.
Subject to status
With a system that allows people to purchase a property for a minimal deposit, there will of course be some risk attached. As such, potential buyers will be vetted, the same as they are when they buy a house at any time.
The big lenders
The good news is more than one of the big lenders has already committed to the scheme, with others promising to get involved over the next few months. However, others are playing it cagey and are not committing until they have a clearer view of exactly how it will all work.
With RBS offering a fixed rate of 4.99% with no fee based upon a 5% deposit, potential buyers could be looking at paying a total of around £10K upfront on a £200K property. Channel 4 reports that “Halifax will start offer a rate of 5.19 per cent with a £995 fee, for those with a 5 per cent deposit.”
Barclays too, have announced that they will be joining the government’s help to buy scheme. However, it’s still early days and as of yet, they haven’t given any exact figures of products or rates that will be available to buyers.
The thought of no fees will also appeal to potential buyers. After all, there will always be solicitor’s fees and other connected fees that will have to be paid. As such, the idea of making any kind of savings will of course, be welcomed by all buyers.
As always there are rumbling about this raising property prices and the ongoing concern of a housing bubble. However, as yet, there are no signs that either of those things are any closer than they were. The BBC report - Peter Spencer, the Item Club's chief economic adviser, said government efforts to revive the mortgage market had been "well-timed and targeted. Despite the recent criticism of these initiatives, the chances of seeing another housing market bubble are extremely slim," he said.
Hunters MD Kevin Hollinrake somewhat agrees with this, commenting: “It's so ironic, we're hardly out of one crisis and we're already predicting the next. When the expansion of the Help to Buy scheme was announced in March, the market was in a completely different place.
“Since then our sales volumes have increased by 35% and prices are increasing due to much greater demand from buyers, largely driven by confidence. Every sale we agreed in one of our offices last week went to best offers and we are concerned that more demand without a similar increase in supply will overheat the market. Our hope is that the government will keep a close eye on things and will limit the scheme if things get too frothy.”
On the face of it then, this new scheme looks like an excellent opportunity for those people who are desperate to buy a property, yet simply can’t afford to based upon the deposit and fees. What’s more, there has already been a lot of interest and the chances are a lot of properties are going to change hands over the coming months as many people take advantage of it.
However, the danger that it could cause a housing bubble can’t be ignored and it’s up to the government to ensure that the market is monitored closely to avoid just that happening.
The market outside of the capital
For those who don’t live in London there are already signs that things will improve on the housing front. This is Bristol reports “A SIGNIFICANT increase in the number of home buyers in the South West buoyed by greater availability of mortgage finance and the Help to Buy scheme is having a positive impact on new homes development and sales in the region, according to Connells' New Homes Partner, Jeremy Setter.”
While the help to buy scheme is open to everyone, it really is the first time buyers and those with very little equity in their property who will benefit the most. For first time buyers it offers a very real opportunity to get out of rented accommodation and in to a home of their own. Once settled, they can then think about moving up the property ladder until they find the home of their dreams.
For people who already own their property, but don’t have enough equity or savings to upsize, they too will have greater freedom if they should want to move.
It goes without saying that not everyone’s circumstances will allow them to take advantage of the scheme right now and the good news is, those living in rented accommodation are likely to see benefits as well. According to the BBC, people living in rented accommodation in London could see their rent fall by as much as 5% over the coming 3 years.
For those paying £1500 per month rent, that figure equates to a healthy £75 per month or £900 per year. While it’s true that at the moment the nation’s capital is booming when it comes to rentals and purchases alike, the housing shortage may affect this negatively in the long term, unless more activity is created around more new builds, according to Gideon Gold, Director of Hunters, West Hampstead.
Right now, it’s all looking good on the help to buy front for renters in the capital and buyers alike. If the balance is just right, this could see an improvement across the whole country as more homes are built and opportunities arise for everyone. As Mr Gold pointed out though, long term gain can only really be realised if the government also concentrates their efforts on supporting the building industry even more.
Not everyone in property agrees that the scheme is a positive move in the long term and almost all agree that it could lead to issues. However, it’s certainly given the economy a boost and this is something that the UK was in desperate need of.