It’s a controversial headline, we know. However, over the past couple of weeks, we have seen the mainstream press reporting on Help-To-Buy in a very negative light, highlighting aspects of this scheme that many in the industry have been debating for some time now.
It is perhaps worth re-visiting what the Help-To-Buy scheme is and exactly how it works. The aim of the scheme is to allow first time buyers or home movers, who may only have a small deposit, to buy a property. The Government will provide a loan of between 20-40% (depending on the location of the property). The buyer must provide 5% towards the purchase and the rest is raised in the form of a mortgage secured on the new property. The loan is interest-free for the first 5 years. So far, so good. To many buyers, this would seem an absolute ‘no brainer’, an interest-free loan which allows them to escape expensive rents and to get a foot on the property ladder. However, there is one condition and it is that the property purchased must be a new-build. It is this condition which is now coming under some scrutiny.
A recent article in the Daily Mail about Help-To-Buy said the following:
“Money Mail spoke to a number of senior directors at property firms who said they had real concerns first-time buyers were being lured into a trap.
Three property market experts separately told us that Help To Buy new-build homes were being priced 15 per cent higher than they should be.
If the experts are correct, young families will run into trouble when they decide to move. For example, say you buy a house for £450,000 that is 15 per cent overpriced.
If prices don’t rise, when you come to sell, the next buyer could receive a new valuation of £382,500.
If you had borrowed 95 per cent of the property price to buy your home, you would be on the hook for £427,500 to pay back the bank and the Government, less any mortgage you’d paid off so far.
That would leave a £45,000 shortfall you’d need to find.”
This is something that we have thought about for a while now at Clifford Davis. It has been clear to us that many new-build flats have been coming to the market at prices similar to older 3-bedroom houses. We have debated whether it is the new flats which are over-priced or the older houses which are under-priced. The answer appears to be the former.
As the scheme has now run for some time, we are starting to see some real-life examples of the consequences of this apparent overpricing. Under the scheme, the loan must be paid back upon the sale of the property. A recent article focused on a young couple attempting to sell their new-build flat, bought under the Help-To-Buy scheme. Again, from the Daily Mail:
“But when they had their property valued at the end of last year, they were told it is worth only £175,000 — £30,000 less than they had paid.
It means that if they sell their house, they will lose the £10,000 deposit they saved so hard for and have to find a further £8,000 to repay their mortgage lender.
Charles and Jessica now fear it could be years before they can afford to move to a larger property.”
Many of our clients have found the Help-To-Buy scheme tremendously useful. However, before any of our clients do make an application to buy under the scheme, we will always look at their other options and the implications of borrowing under the scheme. Perhaps the most important point is making sure that our clients have an ‘exit plan’, should the clients want to sell the property in the future. Help-To-Buy will not be suitable for all first-time buyers. There are several mainstream lenders who now offer 95% mortgages, which can be secured against older properties, not just new-builds.
Please do not hesitate to contact us if you are a first-time buyer or an existing homeowner considering moving and require a clear explanation of the options available to you.
