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The Help to Buy Loan Scheme and its Effect on the British Housing Market

In April 2013, the British government launched it much touted “Help to Buy” scheme. This scheme, also known as Help to Buy equity loans, was launched at the tapering end of the recent major economic recession that created ripples across the world. The U.K. government planed the program with the aim to provide the housing, real estate and construction industry a rejuvenating shot in the arm. As a result, it would create jobs, help the economy recover and boost the GDP of the U.K. However, in relation to the public, it would provide an opportunity to get on to the property ladder. This would hold particular importance to first time buyers, who previously didn’t have the means to purchase their own home. Obviously, as a result of this program, there would be a number of prospective buyers who would be rushing to hop on to the property ladder before the dynamics of the market change.

This scheme, in essence, allows the British public to buy a house by putting down just 5% deposit towards their mortgage. A loan from the government can be secured at 20% of the total property value leaving the rest 75% to be paid as the mortgage. The 20% government loan has proved to be of particular attraction to buyers as they don’t need to pay any interest for the first five years. After that the borrower is charged a fee of 1.75% of the loan’s value, which will then increase every year at 1 per cent above the inflation rate. This loan is therefore, lent at a much lower interest rate than from any other lenders.

The limitation of the program has been placed at a property value of £600,000. Also, since the property values in London are far greater than that of anywhere else in the country, the government announced a specific version of Help to Buy that applies to properties in London. This version allows the borrower to lend a sum equal to 40% of the value of the property from the government. The interest rate and time frame would remain the same, though.

This scheme has apparently fared very well in the public view and has been taken advantage of by nearly 150,000 Britishers. Upon a closer inspection of this number, market analysts have discovered that although a big part of the Help to Buy scheme was to provide first time buyers a chance to enter the market. However, just about a third of all the buyers who employed this program were first time buyers, and that number is not much larger than the 23% of first time mortgagers before the launch of the scheme. A brief analysis of the unforeseen drawbacks of this program can be outlined here:

Program is Dominated by Rich Buyers:

According to data collected by the British government on this program, majority of the byers using the Help to Buy scheme had an annual salary well above the national average. This means that the richer members of the public are exploiting this system legally to gain even more properties. While the British government insists that this policy was meant to help the average joe on his/ her way to owning a house, the data paints a different story. Obviously, the well- off members of society are taking full advantage of this situation.

As a result, members of the public have been calling for reforms to the program to favor the average income bracket. Otherwise, the well- to- do buyers will have a head start owing to their available wealth.

Property Price Balloon:

Understandably as the demand for buying houses increases given the extensive support of the government, the price of the average house in the U.K. has dramatically increased. A number of economists have voiced their analysis that this scheme is a direct contributor to the spiraling house prices over the past couple of years.
Property analysts Savills have released their study results showing that the average house price in the region of London has risen by a staggering 21% over the past five years. Their data is mirrored by the Office of National Statistics showing the price of an average home had risen by more than 10% just a year after the launch of the program.

In addition to these two primary concerns, housing agencies have stressed that without a strategy for building more houses to keep up with demand, the property prices would keep increasing rapidly.

In spite of these drawbacks, the scheme is helping people get onto the property ladder, albeit not to the levels hoped by the British government. The government loan program has also created a safety net to ensure borrowers who might be strained economically, don’t get into serious financial trouble. This point was identified by the Bank of England’s financial policy committee saying that the scheme does not present a material risk to financial stability.

Statistics of People Paying off Their Loans

An increasing amount of Americans are not only taking out loans, they are becoming more and more aware of the benefits for keeping on top of their re- payments. Knowing the pros and cons of the financial agreement that a borrower is signing is vital to forecast how they will manage their debt over time. One of the biggest forms of loans in the U.S. in 2015 was mortgages taken out by people for buying a family home. As a matter of fact 56% of all the housing units in America are owned by its tenants. This accounts for a huge amount of financing on banks and other lenders, and a great deal of committed planning by the borrowers in order to pay this off.
This article expands on, not only how and how many borrowers pay off their loans, but also explores the situations where they manage to keep up with their payments in line with their financial agreement. In some cases, the financial planning of borrowers even makes it possible to pay off their debt well ahead of time, reducing the overall amount they have to pay back.

Mortgage Repayment:

Recent data collected by the American Community Survey has shown that out of the 56% of American tenants who own their residential buildings (houses, apartments, flats etc) about a third of them had no mortgage left to pay. According to the same study, about 10% of the remaining two thirds of people who had an outstanding mortgage, had less than 20% of the total finance to pay off.

Although, the majority of home- owners had less than 50% of the mortgage to pay off, 30% of all borrowers had more than 70% of the payments to make. According to data experts, this shows a healthy balance in the mortgage market as the majority of home- owners have successfully paid most of their payments, yet there is a sizeable portion of borrowers who will keep paying into the system.

Some home- owners, however, plan well ahead to pay off the entire mortgage earlier than the original agreement. This would, over the course of the financial contract, save a great deal of money and shave off years of payments, possibly even decades. An independent, publisher and comparison service company based in the U.S. conducted a study in 2015 that showed that a small portion of mortgagors intended to pay off their dues sooner than they had agreed to with their financers.

For this the borrowers usually took out a 30 year mortgage however, they kept augmenting their premiums with additional payments from a second income. This would, in essence, reduce their mortgage duration by an average of a decade. A 30 year finance option is selected because it usually offers the mortgagor the flexibility to reduce the length of the contract by paying more, without any penalties.

Credit Card Repayments:

This section of loan repayments in the U.S. is particularly complicated. Data collected by Gallup in 2016 shows that about 70% of American adults have credit cards and about a third of credit card holders have more than one. The mean debt taken out by a borrower per credit card in the U.S. is about $5,700 as reported by the Survey of Consumer Finances report conducted by the U.S. Federal Reserve. This number has been increasing steadily over the past few years, however contrary to this trend; fewer people are defaulting on their premiums. A study conducted by The American Bankers Association reported credit card accounts that were 30 or more days past due dipped slightly to 4.18% recently.

This indicates a better understanding of the credit card system and planning for payment of premiums. This trend also suggests a better lending criteria set out by credit card issuers and improvements made in their screening. These points have been substantiated by FICO, a leading data analytics company that specializes in credit card loans. According to them, the average FICO score of a credit card user has been improving slightly year on year from 695 in the beginning of 2015 to 699 at the end of 2016. The higher the FICO score, the better the borrower’s credit rating and is more likely to secure a loan from a lender.

This, and similar scoring systems are used by financial institutions to gauge the ability of a borrower to make their due payments on time. According to the Census Bureaus’ 2012 Statistical Abstract, there was an average of 1,170,000 filings of bankruptcy annually. However, it can be contrasted according to the U.S. Bankruptcy Courts where there were a greatly reduced 844,495 filings in 2015.

The Boston Fed’s recent study on the credit industry showed that about 35% of Americans paid their premiums completely off every month. With the increasing availability of credit, the lure of taking out a loan seems too big to ignore. However, according to the numbers, the public seems to be keeping on top of their awareness about taking out credit.

Most common types of loans taken out by people

Provided the array of frequencies at which socio- economic conditions and trends fluctuate and their effect on the economic requirements of private as well as corporate spheres, it yields a fertile ground for a diverse range of financing options. These financers are a vital source of funding for personal expenditure which in turn maintains the economy.

There have been a number of studies and surveys conducted over the years to determine the nature and effects of different types of credits or loans and how it impacts various factors. For example, one of the most common types of payment for everyday expenditure in the U.S. is paying by credit cards. This transaction is a form of loan being taken out by the borrower, or the individual making the purchase with their credit card. The collective amount that is charged to the relative credit account is paid at regular intervals. An interest is charged for using the card which is how the lender, the issuer of credit, makes their revenue.

This type of lending is commonly known as an open ended loan. It means that there is no pre- determined end to the issuance of credit and will continue until the agreement is cancelled according to the contract.

In contrast, mortgages and car financing loan agreements have a definite end: until the payment and added expenses are paid for in full for the product. This type of credit is a close ended lending agreement is secured against the property. This usually means that the financed property belongs to the loan provider until all the payments have been made in full. Until then, if the borrower defaults the payments, the secured property will be seized by the finance provider. However, finance providers generally have clauses in the agreement that allows concessions under certain circumstances. Under these circumstances a borrower might be allowed to pay just the interest instead of the coupled payment premiums for a time period, or a payment can be rolled over onto the next due date. These concessions allow borrowers some breathing space, if an unforeseen circumstance emerges suddenly.

Apart from the above mentioned broad categories of the lending systems, this article will tabulate the most common specific types of loans taken out by Americans and briefly expand on the nature of each of them.

Credit Cards:

Paying for transactions by credit card forms the largest personal open end loan system in the U.S., with about $730 billion worth of credit owed by the mid of 2016. Since this type of lending is not secured against any particular property or asset, it is classified as an unsecured loan agreement. A borrower uses their credit card at the point of purchase and pays the sum owed at the end of the month to the credit issuing company. Interest rates paid for using these cards vary depending upon the credit history of a customer and their financial situation. However, according to a market research company in the U.S., the average interest rate is about 15%, although this could be much more if the borrower has a bad credit rating.

Mortgages:

A mortgage is a payment that a borrower pays to a bank or a financer who has made the full payment of the house to the seller. In this way, the borrower owes the money for their house to the lender and payments are spread out over a few decades as manageable premiums. At the end of the year 2016, U.S. mortgage payments that were owed to financers amounted to $8.36 trillion.

This type of borrowing generally has one of the least amounts of interest rates as it is a secured loan and house prices don’t depreciate nearly as quickly as that of, say cars. So, even though car financing and mortgages are both secured against the asset being bought, a car would depreciate quicker. It is explained by the Federal Housing Administration (FHA) as if after several years during the payment period the financer has to repossess the asset, the value of a house would be more or less the same depending upon the upkeep. The financer wouldn’t have a risk of losing much.

Car Financing:

This brings us to car financing and the $1.1 trillion worth of current policies taken out till the end of 2016. A car payment is similar to a mortgage; a closed ended loan that is secured against the asset being purchased. However, as the life of a car is less than that of a house, the interest rate is considerably higher. Although, if a borrower does not have the funds to outright buy the car, they can spread the cost over several years with a car financing plan.

These loans form the bulk of lending transactions that take place across the U.S. Financing options like mortgages, car finance and others, allow borrowers to possess properties that would have been otherwise unattainable. This practice has become so common that it is now a norm for a U.S. citizen to have one type of finance running or another.