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The Budget: Help to Buy Scheme

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Thursday April 18, 2013 at 9:00am
The budget was a pretty lack lustre affair. The much trailed General Anti Abuse Regime (GAAR) has failed to stop any of the tax planning that we have available. A greater deterrent to such planning is the much more aggressive approach HMRC is now taking in its correspondence.

One initiative that did catch my eye was the new Help to Buy scheme. There are two variants of the scheme with the first part being launched this month. For the next three years buyers of New Build properties up to £600,000 in value can enter into shared ownership with the government.

Help to Buy – Interest Free Loan

The scheme works as follows: The buyer needs a 5% deposit and then the government comes along with an interest free loan of a further 20% of the property value. This means that the buyer needs to raise the remaining 75% of the value of the property from the building society or bank. Clearly the commercial lenders are going to be more willing to lend at 75% loan to value at reasonable rates rather than 95% loan to value whereby they will either lend at penal interest rates if they lend at all.

The scheme is aimed at first time buyers, buy to let landlords and second home buyers are excluded. The catch, if there is one, is that the government own 20% of the value of the property, not unreasonable as they have put 20% of the money up at nil interest rate. After 5 years the lender will pay a fee on the government debt of 1.75% of the loan. This fee will increase each year by RPI plus 1%.

Help to Buy – Mortgage Guarantee

The second part of the scheme starts in January 2014 which comes in the form of a mortgage guarantee covering all properties up to £600,000 in value. As long as you have a 5% deposit the government will guarantee up to 15% of the value of the loan. The idea is that lenders will be more willing to lend in general if at least part of the loan is guaranteed. Although this scheme will be fee based the cost of the guarantee is not clear yet.

So both schemes will help first time buyers with small deposits. The Mortgage Guarantee scheme will help existing home owners with not much equity to remortgage with another lender. As you can imagine there are critics, largely aimed at what the government should do to ensure tax payers do not get stuck with loans made by banks who see the taxpayer taking the risk whilst they get the bulk of the benefit, I’m sure we have been here before.
 
Risks in Help to Buy

Perhaps a more serious risk is that of encouraging borrowing to purchase an asset, that is housing, that is already inflated in value on historic measures. The whole guarantee scheme works on the premise that house prices will keep on rising. So what happens if they don’t? Well the borrower loses their 5% deposit and any equity they may have had in the property. The tax payer loses the next 15 or 20% depending upon which scheme it is. And finally the bank or building society loses after that.

The government could always have helped the housing shortage by providing incentives to house builders to build more, or relaxation on planning restrictions but then there probably weren’t the votes in that one.

Although we don’t arrange mortgages we do have several good mortgage brokers we can recommend based on client experience of dealing with them.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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