For the first time in years, I am genuinely excited about the property market. Why? Because the 5% deposit is back!
Let’s be clear: the first-time buyer is the foundation of the property market. The person selling their three-bedroom semi to move to their dream four-bedroom detached house would probably be selling to someone upgrading from a two-bedroom flat, they themselves having upgraded from a one-bedroom flat. The person buying the one-bedroom flat would most likely be a first-time buyer. Without the first-time buyer there is nothing and the whole chain collapses.
When the Help to Buy scheme was announced in August last year, it was designed to enable first-time purchasers to put down a 5% deposit on a newly built home, much less than some banks now demand. Just like in the old days! The scheme would include home movers too and up to 20% of the cost of the home would be funded by a shared equity loan, which would be interest free for the first five years. In effect, the government would be taking a stake in the borrowers’ homes and has set aside £3.5bn to invest in these loans. The value of the shared equity loan is linked to the property’s value. So, for example, if the value of the property had doubled by the time the shared equity loan is repaid, the amount the borrower has to repay would have doubled, too
So is it working? Certainly, figures in April 2013 showed that new buyer enquiries were at their highest level in three years. However, results in London are mixed. The fact that the scheme is limited to new-build properties certainly reduces its appeal and mortgage experts have expressed concern that some of the bad practices associated with the property boom may be creeping back. They are critical of some of the methods developers are using to market their properties to first-time buyers who might be eligible for the Help to Buy shared equity programme.
It has emerged that developers are marketing their properties at prices 20% below the correct asking price, implying that the equity loan is some kind of discount or free gift. Antony Lopez, independent financial consultant at Sterling & Law says: “This sort of practice is fairly widespread and, in my view, much of the advertising is misleading. There were always worries that these subsidies would encourage the kind of bad practices which undermined the market before, so stringent guidelines were drawn up requiring all advertising around these deals to be clear. It seems to me that much of the advertising is not at all clear, and potentially misleading.”
Lopez continues: “Slicing money off the price implies it is a gift from the government. It is not. An equity loan is precisely what it says it is. It is a loan which has to be repaid. The worry is this will encourage people to take on debts they do not understand, or overstretch themselves and buy bigger properties than they can afford, which is not what the scheme was designed to do at all. It is there to help those at the very bottom of the ladder make a start.”
Nonetheless, the government will extend the scheme to encompass older properties in 2014, at which point there will be much to be excited about.