How Will the Help to Buy Scheme Affect the Housing Market?

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Following the announcement at the weekend, we look at how the Help to Buy Scheme will affect the housing market in the UK: Firstly, what is the Help to Buy Scheme? The Help to Buy Scheme is a Government-led incentive that is designed to help buyers purchase a property with only 5% deposit.
Help to Buy Equity Loan The Help to Buy Equity Loan scheme was introduced in April 2013, whereby the government provides an equity loan of 20%, the purchaser arranges a mortgage for 20%, and therefore requires 5% deposit.
This scheme was only available for the purchase of New Homes.
Help to Buy Mortgage Guarantee In September 2013, the government introduced the Help to Buy Mortgage Guarantee.
It means that buyers with only 5% deposit will be able to apply for mortgages.
The mortgages, available from several high street banks, will range from 80 percent to 95 percent of the value of a property.
It works because the government will guarantee between 5% and 20% of the mortgage, so if the purchaser defaults, the lender's liability is reduced.
This will encourage lenders to offer higher loan to value products, such as 95% mortgages, at more competitive interest rates.
How will this affect the housing market? It is estimated that the scheme could generate an extra 400,000 house sales over just the next three years.
An increase in lending confidence will attract more first time buyers and existing home owners to move.
Experience tells us that an increase in buyers through online estate agents doing Help to Buy will result in an increase in house prices, which will then enable vendors in negative equity to suddenly be in a position to move up the housing ladder again.
It is believed that the Chancellor is hoping that by making mortgages easier to come by, it will encourage house builders to increase their annual output.
This should, in theory, create more jobs and also help to stabilise house prices by increasing the supply to satisfy the demand.
One potential pitfall with this theory is that by 2016, new legislation will come into force meaning that all new homes must be carbon neutral.
It is estimated that this will add an additional £40,000 to the cost of building each new home.
House builders will probably concentrate on building more expensive plots where these costs can be more easily absorbed.
It is also worth considering whether the increase in transactions will lead to an increase in interest rates? In our opinion, there is a distinct possibility that this could create a housing bubble which the Chancellor will need to keep a close eye on.
It will be interesting to see what the outcome will be in three years' time when the scheme comes to an end.
Will the housing market collapse again, or will the economy be strong enough to sustain a collapse?
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