Through The Keyhole – Help-to-Buy

Helping to buy or not helping at all?

A landmark scheme from the government has been launched this week, months ahead of schedule, with the aim of helping first-time-buyers get on the property ladder.

Sounds great right? Well it has been met with a decidedly frosty reception by, unsurprisingly, the Labour party opposition and, much more surprisingly, by the International Monetary Fund (IMF), among others.

So what is the scheme, how is it supposed to help and why is it unpopular in some quarters.

Help-to-Buy is an extension of Right-to-Buy, a program introduced during the Thatcher years where council house residents could buy their home at a substantial discount.

This policy is aimed a little higher up the market and offers a three part mortgage deal, a 5% deposit from the buyers, an equity loan from the government of up to 20% and a standard mortgage covering the remaining amount.

The idea behind it is average income earners will no longer have to save up for years to afford a deposit, equating to around a quarter of the value of the house.

On the face of it this is a great idea, in a market currently dominated by the buy-to-let market, so why are some convinced it is flawed?

The first problem is the policy only creates the illusion of making housing cheaper, in fact it arguable makes them more expensive.

A standard mortgage involves a large deposit and paying off the remained over an extended period of time.

Help-to-Buy involves a much smaller mortgage, but paying off a much larger proportion of the property’s value.

It also makes an assumption about a 5% deposit being an affordable target.

Yes, it is easier to save up 5% than 25%, but either way these are still large amounts of money.

A £300,000 home will require a £15,000 deposit, while a £150,000 property will still involve saving £7,500.

Couples on average incomes will be able to afford this much sooner than a £50,000 deposit, for example, but it will still involve making sacrifices.

Lower income earners with children, the group who benefited the most from Right-to-Buy, however, will still really struggle to see this as a logical option.

Unfortunately some even greater issues arise once the deposit is found.

When people find a home they will have to repay 95% of its value, the 75% mortgage plus the 20% equity loan, with the later only interest free for five years.

With conservative estimates on average property values, people will still be looking at over £1,000/month in repayments before interest, just on the mortgage without the equity loan, over a 25-year period (Based on Clydesdale and Yorkshire Banks official figures).

Admittedly, this is not dissimilar from the average rent in London, but similarly house prices are higher in the capital resulting in higher repayment levels.

There is a serious irony about a government fixated with cutting the national debt level, while encouraging people to incur large amounts of long-term debt in the name of the national obsession that is home ownership.

It also needs to be taken into consideration the people applying for these mortgages will probably not be getting preferential rates from their bank. They are after all those who would have struggled to get a mortgage without it.

On top of this buyers will also have to pay over £1,000 in bank and lawyer fees, not to mention also remain able to maintain rent on current property, energy bills and food.

The issues with this can best be summed up by the comments of Martin Lewis, founder of MoneySavingExpert.com.

Lewis said Help-to-Buy mortgages were “still very costly compared to normal mortgage rates.”

He went on to say those considering small deposit mortgages should consider a 10% deposit to get a better repayment package.

If this is starting to sound strikingly similar to the sub-prime mortgage collapse in the USA, where people were given mortgages when they clearly could not afford to pay them off and which was a significant factor in the banking collapse, then you are not alone.

There are also economic issues, which is where the IMFs issues start to come into play.

Supply and demand is a basic premise of economics, with the idea being as demand goes up, price comes down.

However, in housing this idea is flawed as supply is not rising to meet the demand.

Throw into the mix the fact the housing market does not suffer from a lack of demand and the problems become clear.

Static supply meets rising demand in an already overcrowded market place and already inflated house prices rise even further making it harder still for first time buyers to get on  the property ladder.

This scenario is by no means a certainty, but is a very real possibility.

Unfortunately, this demand issue brings with it a much more real problem for the would-be home owner.

Ask anyone under 35 years old who is trying to buy a house on a moderate income and you will hear the same stories.

They had the mortgage in place, found the house, but were then out-bid by a rival buyer. Help-to-Buy does not stop this happening.

Some will claim this is the nature of a free-market economy, every commodity has a different value to all people and those who want it more pay a higher price, but it is of little consolation to those who will either have to take out a larger mortgage or settle for a cheaper home.

Then there is the knock on effects this could result in.

People tied into long term debt to such a large extent are unlikely to consider major renovation works, such as new kitchens, bathrooms, and conservatory’s, redecoration, or even expenses in the service sectors like retail or tourism.

While consumer spending is certainly not the be-all-and-end-all of a recovering economy it is a major factor.

People who spend money have disposable income and thusly feel secure in their jobs and are positive about the future.

In fact the employment rate amongst builders, decorators and other tradesmen is a significant indicator of economic health.

There is a reason the phrase for an economic recovery is called ‘green shoots’, it is because economics works from the ground up, not top down.

Although, as this blog has previously published, there are serious doubts about the long-term validity of the UKs desire for home ownership (New World Order – Pensions, Retirement and Saving 6-9-13), people should not be discouraged from buying a home.

Being a property owner brings with it many benefits, greater retirement income, improved credit rating and long term cost-of-living reductions to name a few.

However, if people are continually stuck in a cycle of long-term debt the clear and present problem of economic growth is forsaken, which has a detrimental effect on everyone.

Despite its many flaws, Right-to-Buy at least made buying cheaper, whereas Help-to-Buy does not and in the long run is probably more expensive.

The problems of rapidly rising house prices, a lack of construction and unrealistic financing systems needs to be addressed, but with so many flaws and potential pitfalls this system seems to tick very few of the boxes.

Help-to-Buy encourages buyers, but in the wrong way.