Get to Know the Hidden Consequences
Since the inception of “Help to Buy” schemes in 2013, the limelight has never strayed from the lending policies brought forward by the government. However, one is finding it increasingly difficult to tell if they are here for the better or worse.
The agenda certainly appeared to lend support to home buyers. The economic fall back in the UK had indeed forced authorities to come up with something that would console the housing market. But the paradigm seems to be shifting away, from providing help to prospective home owners, toward deeply palpable increase in house prices. Discover in this post, how else one is forced to face uphill by choosing Help to Buy.
Preached to be for the Best – Designed for Something Else!
Here are a few faults and follies, or rather troublesome features, within the Help to Buy plan itself.
1. This is a Limited Offer
Not many banks have agreed to accommodate Help to buy in their mortgage schemes. The budget set by the government for it is sealed at £12 billion while it has been made available on a first-come-first-serve basis. However, that doesn’t guarantee you a better situation even if you applied first. There are the eligibility criteria to fulfil and stress testing to be carried out for the banks themselves.
2. Zero Interest Now Might Turn a Killer Later
For the initial five years, Help to Buy remains a zero-interest personal loan. After the term, it becomes 1.75%, increasing by 1% each year, plus RPI (Retail Price Index); wherein RPI is the measure of inflation. Basically, if the RPI estimated is 2% after completing the first five years, your interest will be 3.75%.
In the long run, you will find a big debt, grabbing considerable wealth away out of your pocket every month. And alas! Once inflation hits big, and if you are unprepared that is, you will be in the “stressed out debtors” club. What you owe would be much higher than the initially loaned amount.
As prices are already over the top, the pay-later scheme is a threatening one. If the price value of a home just peaks, then instalments would be larger, and you may have to pay thousands of pounds at one go. Hence, the ambiguous and variable interest rate of the rigid loan pattern can sell you out in the end.
Don’t forget to learn the tabs by heart, as each instalment will be variable and calculated separately.
3. It's Not Completely Yours Till You Earn it, but Payments are only Your Responsibility…
Yes, that’s how every property mortgage works… but there is a catch here.
Usually the financier owns your property, and you can retain the property value for yourself. In Help to Buy scheme, in case you want to dispose the property, the government is entitled to 20% (or the percentage borrowed initially) as a payback from the retailed price. It seems like you have more to pay, and the banks and government have more to gain.
By the way, be it all the maintenance work, repairs, home renovation or improvement, it is entirely on you. And consent from officials is mandatory before you do any of that.
Do feel trapped? Well, these are the shortcomings of the largely propagated property mortgage plan. The reality is that the mortgage scheme is overshadowed by lots of uncertainty, which can flip sides either for good or bad. Overall, it appears to be a short-term gain, but a long-term misery.
This is the inside story of the scheme, now let’s get to the big picture…
The Bubble Mode is Switched On!
Going by what the United States did towards the end of the first decade, a housing market bubble will be a tragic blooper. The consequences of overheating in the market included fuelling of the US recession in 2007. It was a five-year wait (2007-12), which finally showed gradual development in the real-estate industry.
Britain is also familiar with such a situation, historically. And a repeat will be unbearable for our economy, especially now. The lending schemes are accelerating the opportunity of owning a house through finance. And that is leading to rapid increases in house prices, a trend likely to create the bubble.
We are still in the initial stages of overheating the market, and prevention is something the government can consider. Once the bubble reaction ticks off, we may have to wait for the final burst, which comes along with plenty of unpleasant consequences, often leading to an economic breakdown.
With an impelling housing market in and around the hot spots of London (up to 20% annual price rise) and a few other parts of the country, Help to Buy might need some amendments.
Where are the Homes?
The investment into Help to buy is ideally directed at building homes. On the contrary, the scheme has sprung alive the demand chain, leaving the supply side nearly dead. That is directly linked to the fast rising prices of properties.
Estimates show that residential construction has been moving at a snail’s pace. In fact, the rate of construction has reached the lowest dip since the 1920s. Increasing access to mortgage financing has left a gap between home buyers and newly-built homes. And here’s the twist in the tale – the most benefited folks are the solicitors and of course real estate agents.
With surging rents and cost of living, a roof over the head now takes almost half of a person’s income on average. The government is already late in meeting demands, and now all it can do is map out plans for meeting construction demands and implement them quickly.
Segregating the Rich and Poor
Neither has the government proposed any scheme for the poor, nor does Help to Buy aid them in any way.
The policies support only the tax payers. Furthermore, the stress tests and eligibility factors executed by the banks invariably disadvantage the low-income groups. The cash flow is held within the middle class while levying others with little option or opportunity.
And Talk about the Stocks…
Given the rising demand, shares have been escalating with a very few setbacks. Basically, this has managed the stock market to remain afloat.
Let that not be a temporary answer to stabilize the economy. If you are looking at real long-term solutions, plans and policies have to be implemented by acting in favour of the people’s demands.
Matt Davis a partner at Empire commercial Finance, a firm specializing in Commercial Mortgages London seeking to serve client of UK with ease.