You may have seen the news reports over the weekend (https://www.bbc.co.uk/news/uk-56218952) that the Chancellor is set to announce a scheme to support house buyers with small deposits but the big question is…. HOW DOES THIS AFFECT ME?
How does the scheme work?
Well, at the time of writing the fine details have not been announced but from what we do know it sounds very similar to the Help-to-Buy Mortgage Guarantee Scheme (https://www.helptobuy.gov.uk/mortgage-guarantee/) that was discontinued in 2016. The previous scheme involved the Government providing a guarantee to mortgage lenders to protect them from losses, up to a point, if a homeowner were to be repossessed. The guarantee is between the lender and the Government so it has nothing to do with guaranteeing a customer’s payment. If you used the scheme to buy a £100,000 property you would need a minimum deposit of £5,000 and then you would have a mortgage for £95,000. If you were repossessed the following year and the property sold for £85,000 the mortgage lender would be £10,000 out of pocket – that is where the Governments guarantee comes in and repairs the loss.
Why are the Government bringing back this scheme?
Mortgage lenders look to avoid repossessions and situations where they might lose money so they usually avoid offering mortgages with small deposits. The Government are trying to encourage lenders to offer these mortgages so that First Time Buyers can get on the property ladder.
What does this mean for the rest of us?
Even though the scheme will be open to people who are not First Time Buyers, you could be forgiven for thinking ‘why will this affect me if I’m not looking to move home?’ Without First Time Buyers providing a crucial slice of demand in the market, property prices could fall significantly. The consequences of this on a mass scale could have a serious impact on the economy.
The above chart shows the UK average property prices from January 2000 until December 2020. You can clearly see the effects of the 2008 crash. Government intervention, by way of introducing Help to Buy, began in 2013 and you can see the gradual increase in property prices from 2014 onwards. But you may still be thinking ‘how does this affect me?’
Falling property prices affects people who are re-mortgaging to release equity. This might be for home improvements or to repay unsecured debt but if your property value is falling there is less you can borrow against your home. Furthermore, it is becoming more commonplace for people to use their property as an additional asset to fund their retirement. Many people do not have the same level of pension provision as they had in years gone by so using the family home, either through downsizing or taking a Lifetime Mortgage, is becoming more popular to supplement that retirement income. So, it isn’t just First Time Buyers that are affected.
Nowadays there are many property landlords who are Tradesmen in their day jobs and haven’t yet connected the dots on what this scheme means for them. Potentially it is good news. Landlords with over half a million pounds worth of property could see their wealth drop a considerable amount if house prices were to drop by 10%. Hopefully the new scheme means your portfolio will hold its value. I’m sure these investors will be looking for bargains if there is a slump but don’t forget if you buy a house at a discount from what the properties usually sell for in a street, you’re actually bringing down the average price of houses in that street. It’s a double-edged sword.
Is the new mortgage scheme a bad thing?
So far everything I’ve told you has been quite rosy but I’m afraid there is a nagging worry. And it is just a worry, this is only my opinion and I may be wrong. You have got to ask yourself why are the Government introducing a new mortgage scheme? Well, the only reason I can think of is they are expecting economic struggles post-COVID. From the graph above you can see the dip in house prices after 2008 but back then they didn’t really know the crash was coming or have the tried-and-tested methods to influence the property market like they do today. In 2021, there is an expectation that COVID will continue to affect the economy for some time after the virus has eventually been defeated, so it makes sense to introduce a scheme sooner rather than later. Supporters of the Tories may say they have acted swiftly and concisely while opposers may say many of the leading Tory MP’s are landlords themselves and they are looking after their own interests.
That last point is an interesting one. There are many different asset types and facets of our daily lives that could be prioritised but it seems property is a major priority. Whatever the reason that might be hopefully the property market over the coming years will be similar to that of 2014 onwards but there is still that lingering feeling that the next few years could be difficult for some. Will many companies try to rescue profits by reducing costs? This normally means redundancies and high unemployment and as a result you would expect house prices to drop but could the new mortgage scheme, and a potential extension of the Stamp Duty Holiday, mean property prices hold their value?
If you’re a First Time Buyer holding out for the property slump you may be waiting for something that never arrives. One thing is for sure, if we do have a difficult economy over the coming years then you’re going to need to make sure you get the right advice on your finances.
Comments