David Cameron has recently taken to the media to highlight the merits of the government’s flagship help-to-buy scheme, pointing to figures about an increase in young buyers as clear evidence of the initiative.
The Prime Minister highlighted that over 2000 people had already used the scheme to purchase property, adding that a large proportion of these individuals were young, first time buyers.
The scheme has come under fire recently due to criticisms about it risking a ‘housing bubble’ and negatively impacting consumer ability to purchase property in areas such as London and the South East.
However Mr Cameron identified that most these people had relatively low incomes and were present outside of London and the South east.
Nevertheless, an announcement made by the Bank of England last week has fanned new fears about the scheme, with the organising identifying that those currently using ‘help-to-buy’ mortgages would likely be subjected to large interest rate increases after their initial fixed two year terms comes to an end. It had initially been thought that such rises would not happen till 2017, but it now appears that it could happen as early as late 2015.
This means that people currently using ‘help-to-buy’ mortgages will be faced with a huge rise in the amount they pay each month when interest rates rise. People who are currently benefiting from 0.5% base rate could in reality be paying almost £3000 more a year should it increase to 2.5%.
The problem appears even more alarming when statistics currently indicate that 1/3 of households is currently allocating 33% of their total income towards housing costs. With the cost of living rising all the time, and the rate of change in wages not following suit, there seems to be a real danger that new home-owners will not be able to afford their monthly costs come 2015.
Help-to-buy was first implemented earlier this year and has adopted a two pronged approach in a bid to bring back consumer confidence in the property market.
The Equity Loan Scheme allows new buyers to borrow up to 20% of a new build home, interest free for 5 years.
They will then need to pay a 5% deposit to purchase the house and will still need to find a mortgage lender to cover the other 75% of the property costs.
The Mortgage Guarantee Scheme allows new buyers to pay a 5% deposit on any property up to the value of £600,000. They can then attain a mortgage up to 95% of the property’s total value. The government will then guarantee the mortgages for anyone who is borrowing over 80% of the house value in case they fall into tough financial times. This is to give providers a form of insurance for offering such high loan to value mortgages.
The greatest danger being posed is in the capital and south east, where people utilising Help-to-Buy mortgages are taking the largest gamble of them all. This is because property prices are already the highest in these areas, and are rising at an incredibly quick rate. High loan to value mortgages would see new homeowners already high monthly costs rise to an arguably unaffordable level.
The current landscape in the property market has prompted the formation of campaign groups to address the high prices of property in certain areas. Once such group, Priced Out, has heavily criticised the Help-to-buy scheme arguing that it had not aided any individuals in areas where house prices had risen.
The argument is that the mortgage guarantee scheme has led to high interest rate products. This means that on average, the monthly payments for a first time buyer is actually larger than the average rent on a property anywhere in the country.
According to priced out, this equates to £300 more in London, £250 in the south-east and around £220 in the south west.
Priced Out’s remarks imply that young prospective property owners should actually allocate their money to renting housing and saving away for mortgages that offer better interest rates than help-to-buy ones. Nevertheless, due to the volatility in house prices at the moment, waiting could lead to even severer rises in property costs.
However, taking this stance would ensure that people are not entering into mortgage arrangements that will place them into high levels of debt. Many housing commentators have argued that the government should focus on building houses and improving supply, rather than increasing debt and artificially inflating the value of property.