Category: Mortgages

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.