Help to Buy Scheme

The Help To Buy Scheme was introduced in April 2013. The aim to help Generation Rent(who are unable to buy houses due to high prices and the lack of mortgage availability).

There are two parts to it, for both of them help is only available on properties worth less than £600,000.

New Build

The scheme offers to lend a 20% deposit for a new build house, providing the borrowers have been able to raise a 5% deposit themselves. The loan is interest free for the first five years and then is charged at 1.75% for the sixth year and thereafter increasing by 1% plus RPI inflation rate.

The aim of this is to allow potential purchasers to get access to the much cheaper mortgages that are available with deposits of 25%. The Government hopes that this will stimulate demand for new houses, this is important as construction is a labour intensive part of the economy and so may help to reduce unemployment. There is also a looming shortage of housing in the UK driven by demographics.

Guarantees for small deposits

This scheme guarantees the mortgage lender against losses where deposits are small. Interests rates often differ dramatically where individuals have very low deposits. This is because if the borrower stops making payments the bank has to repossess the property and sell it. There are expenses involved in these activities and so in order to be prepared to accept the extra risk of being repaid banks require higher rewards.

There is not much information on this yet.

The government is consulting on this scheme. It seems to want to target first time buyers, rather than just provide a tax funded boost for Buy to Let investors.

Aims

Both schemes aim to address the high interest rates that people with limited deposits face. I have taken some data from a big high street lender for five year fixed rates. Those with low deposits face far higher rates than those with large deposits. Anecdotally mortgages with lower deposits are harder to obtain as lenders have stricter lending criteria. The difference between a 10% and 40% deposit is about £7,000 per £100,000 borrowed.

It remains to be seen whether either scheme will achieve the aim of stimulating the housing market and the increasing access. However it is noteworthy that the political consensus is that these schemes are good ideas, although there is some concern that these may cause a housing bubble. Certainly although falls in prices may benefit want-to-be buyers(and those on some internet forums) there is nobody in any major political party after this.

The limit of £600k is interesting as this is not a trivial sum of money, and although the scheme is aimed at first time buyers is  far above the typical first time buyers budget.