Help to Buy pushing house prices down?
Analysis by some independent mortgage advisers suggests one part of the government’s new Help to Buy scheme, designed to pump life back into the housing market, may bring down new-build property prices.
Buyers of a new-build property who use a Help to Buy shared equity scheme should bear in mind that, as the developer is no longer subsidising the mortgage, they will now be in just as strong a negotiating position as if they were using any other mortgage and therefore should be much better placed to negotiate a discount off the list price and/or some other benefit.
Under Help to Buy the government is offering to lend anyone who wants to buy a new build property worth up to £600,000 a fifth of the value of their property as an interest free “equity loan” to be repaid to the government when the property is sold.
It builds on an existing government scheme called FirstBuy, which was only on offer to first-time buyers earning less than £60,000 a year.
The critical difference between the two schemes, which could bring prices down, is that under FirstBuy the 20% equity loan was part funded by the government and part funded by the developer selling the property.
But Help to Buy is solely funded by the government leaving developers with no vested interest in the value of the property after it is sold.
Persuading a customer with a 5% deposit to use this new shared equity scheme will cost the developer nothing, whereas if that same customer uses a NewBuy mortgage [another government scheme due to be replaced next year] it will cost the developer a little over 4% (a 3.5% insurance premium plus an admin fee).
Thus anyone visiting a developer’s sales office today with only a 5% deposit is likely to get very different “advice” as to which mortgage is best for them compared to the “advice” they would have received before the budget.
Despite the risk that prices could be impacted at point of sale however, mortgage lenders are still likely to offer loans under the scheme.
The £3.5bn made available by the Government will support an extra £13.125m of first charge lending over the next three years, enough to make it worthwhile for even the largest lenders to support it, especially as it involves low risk lending with a maximum loan to value of 75%.
The fear that new-build prices could be impacted, is in direct opposition with separate speculation that the other part of Help to Buy, which will see the government guarantee high loan to value mortgages on all property for both first-time buyers and home movers from January 2014, could cause a house price bubble by increasing the supply of mortgages without a simultaneous rise in the number of properties for sale.
Time to buy?
In spite of the uncertainty over house prices, those thinking about buying property at the moment would benefit from historically low mortgage rates, and would avoid a possible house price bubble in 2014!
The cost of fixed rate mortgages has continued to decline over the past month, especially 5-year fixed rates which now start at 2.59%.
Although the Eurozone crisis is inhibiting economic activity in the UK it is also boosting mortgage borrowers by helping to keep interest rates low.
With fixed rate mortgages generally cheaper than trackers or discounts, and 5-year fixes available below 3% on LTVs up to 75%, many people will welcome the opportunity to fix their mortgage payments for as long as five years at current low rates.