The UK government announced plans to bring the help to buy scheme forward by 3 months (8Th October 2013). It has been seen as a cheeky tactic from the ex-chequer George Osborne to win favour ahead of upcoming elections.
The scheme in essence helps buyers to purchase properties that they otherwise may not be able to afford. At the moment the mortgage lenders typically require a 20% deposit; the government is proposing to act at guarantor for up to 15% of the deposit.
High Street banks including Natwest, RBS, Halifax and Bank of Scotland will start offering new Help to Buy mortgages this week. Other lenders such as Virgin Money and Aldermore Bank will offer mortgages from as early as next year.
How help to buy scheme works?
It means someone trying to buy a £200,000 house currently needs to save up a deposit of £40,000.
Leading banks will offer a range of new Help to Buy mortgages – up to 95 per cent of the property’s value – for homes worth up to £600,000.
Under the scheme, buyers will only need a deposit of as little as 5 per cent.
Depending on the size of deposit, the government will then guarantee up to 15 per cent of the property’s value, in return for a fee from the lender.
The scheme is not available on second homes or buys to let properties.
What is the impact of the help to buy scheme?
According to Money Saving Expert, Martin Lewis, the interest rates on these 95pc mortgages will be unfavourable with fixed rate reaching almost 6per cent and variable rates almost 2% higher.
Many people will benefit by having the opportunity to purchase a property with as little as 5pc deposit. The dream of becoming a home owner can now become a reality. At what cost?
With higher rates and a 95pc mortgage; it could make the mortgages unaffordable for people… with buyers being stretched the impact of interest rate increases in the future could be devastating. Were the banks not trying to reduce risky lending, by asking for a 20pc deposit?
The initial lenders that are providing help to by mortgages were already supported by government. For lenders, they have a level that the government is acting as guarantor and could effectively bail them out again.
If we choose to analyse the potential impact on UK House prices by evaluating (help to buy) incentive using theories of Classical economists, such as Adam Smith, who believe that the equilibrium price is determined by forces of supply and demand.
When buyers have to contribute a 20pc deposit toward the house purchase, the equilibrium or market price is £200,000. After the incentive (help to buy scheme) is provided; depositors only have to contribute a 5pc deposit this results in increased demand where supply stays the same. The increased demand will lead to increased competition for the already limited availability of new homes and results in higher prices. Adam Smith equilibrium theory states that the price of the properties should increase by an amount equal to the incentive; the government is guaranteeing 15pc. House prices should therefore go up by as much as 15pc.
‘Investors can benefit by purchasing property investment UK wide because the incentive from provided by the help to by scheme will stimulate UK house price growth.’ Says Arran Kerkvliet of One Touch Property Investment
Areas to benefit most will be London Investment Property because there is pent up demand and the prospects for capital growth are staggeringly high.