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Help to buy scheme to boost housing market

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Help to buy schemeHelp to buy boost housing market

Introduced back in April new government initiative Help to buy scheme  have gathered a lot of positive and negative attention in a short period. Help to buy is a first leg of the government initiative to boost housing market and is focused on helping first time buyers and home movers to buy new-build houses. The loans only offered to home owners, not to landlords for buy to let property, with a cap of £600k. Gov.UK describes Help to Buy Loans as “With a Help To Buy equity loan, you buy your newly built home with at least 75% of the cost met by a mortgage and a deposit of at least 5% of the purchase price. The rest is paid for by the government through an equity loan.”

Help to buy scheme helps to raise house prices

Initial market reaction has been very positive. According to Home Builders Federation (HBF) 4,000 people have reserved a new home in the two months since the scheme launched. Stewart Baseley, the executive chairman of the HBF said: “The Equity loan part of Help to Buy has got off to a flying start”.

The houses prices have been raising in the first half of the year with Halifax reporting 2.6% and Nationwide 1.1% in 3 months to May as shared by BBC.co.uk in their article “Help to Buy off to ‘flying start’ as house prices rise”.

Home builders and estate agents have been promoting the scheme which help to raise people awareness. With low mortgage rates and low deposits people feel more confident they can afford to buy a home, which expects to push the prices higher.

Risk of a “price bubble”?

However for many people there is still no solution. The Help to Buy scheme only works for new-build houses, so if people want to move, but don’t like a new-build, then it’s not for them.

In many cases to raise a deposit still remains a problem, as the inflation and raising prices impacting people ability to save. ThisisMoney.co.uk  highlighted in their article “almost a quarter of those surveyed by BSA for its Property Tracker report said they still need more help to save for a deposit, with 54 per cent of those hoping to buy saying raising a deposit remains a significant barrier to getting on the ladder.”

People also concerned about the interest on a Help to Buy loan. There is no interest for the first 5 years and after that the interest is 1.75% and it will grow every year, which might put an extra pressure on homeowners when they need to pay back a mortgage and a loan.

Help to Buy scheme have also gathered a lot of negative publicity and have been criticised by many economists for artificially raising the house prices, which might impact the economy later.  The house prices already started to raise following the first part of Help to Buy and expected to go up further after the second leg of the scheme when the government will guarantee mortgages in January 2014. The Building Societies Association has warned that there is a serious risk the government’s help to buy scheme could accidentally create a ‘price bubble’. With currently slow economy, high inflation and low ability to save money, the prices will get artificially high and property will become even less affordable. The economists say that the scheme should only exist for a short period of time and should not be extended.

 House in negative equity

Another concern is if house prices were to drop again after a price bubble, then many of properties sold with a 5% deposit would end up in negative equity.  The negative equity phenomenon has been growing in the last few years with house prices falling and is where the debt on a house is higher than a house value in the current market. If a home owner would to buy a property with a little deposit, then after house prices drop again the home owner would have a house in negative equity or owe on the house more than the house is worth. It doesn’t matter if you are not planning to sell your house in a near future, however it might add extra complexity if you need to sell your house in negative equity.

“We believe there is a solution to any property problem.”

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