The Government has made a big song and dance about helping those with small deposits, particularly first time buyers, onto the housing ladder.
However, in my opinion, its plans announced this week won’t work (see the Government unveils mortgage plan MSE News story). And I say this as part of the group it wants to help, as I’m a wannabe first time buyer.
The biggest problem facing people like me is not just mortgage availability, which the Government is trying to address, but high house prices.
Therefore, whatever the mortgage conditions or rate, if prices are too high, lenders will quite rightly not advance us the cash if it means we are overstretching our finances, so it’s a non-starter.
Impossible to borrow
Someone on the average £26,000 annual salary buying the average £160,000 home with a 5% (£8,000) deposit would still need to borrow almost six times their salary to get a home loan, which is practically impossible.
In London, the differential is even worse for many. Salaries may be higher but house prices are through the roof.
Of course, if you’re a homeowner, you want prices to stay high, but I believe there is too great an imbalance between prices and what many 20 and 30-somethings can afford, which is not good for the market long-term.
The government plan is to encourage more banks and building societies to lend to those with a 5% deposit (as very few do), and at the same rate they would lend to someone with a 25% down payment. The latter group currently get more favourable rates as they are deemed less risky.
The Government aims to do this by providing insurance for lenders if a borrower defaults, has their home repossessed and the home sells for less than the mortgage debt, meaning the lender loses money.
If that all happens, the insurance will pay the difference between the income the lender is getting and what it would have got had it charged a higher interest rate.
The hope is the scheme will give banks and building societies the confidence to lend to those with lower deposits at an affordable rate as they will take fewer risks.
New-builds ‘over-priced’
Another reason why the plan is suspect is because it is only available on new-build properties, as has been the case with so many recent state-trumpeted schemes.
I’m no expert on new-build values but the experts I talk to say they are normally over-priced. So not only will buyers pay too much, there is a chance their home’s value will fall over the years, putting many at risk of negative equity (where they owe more than their home is worth).
The flip side to my argument is that this scheme will indeed benefit those who want a new-build who can raise a 95% mortgage, and who currently can’t get a mortgage.
And if the plan encourages more builders to build and therefore increases housing supply, basic economics says house prices should fall.
But that is only one aspect of the multitude of factors that contribute to house prices.
It’s a bigger job to bring them to a reasonable level which is why we should take the Government’s optimism over its plans with a huge pinch of salt.
What do you make of the Government’s measures? Let us know in the mortgage help plans forum thread.
