NewBuy Scheme for First Time Buyers: Good Buy or By Pass?
- AuthorPaul Hajek
Since the credit crunch began, things have been particularly tough for those wanting to get on the first rung of the property ladder - the First Time Buyer.
First Time Buyers have found it increasing difficult to buy their first property due to the insistence of high deposits by Lenders and stricter credit checks.
You might say that First Time Buyers have become an endangered species.
Some first time buyers have been able to fund a purchase via a loan or gift from their parents the so called Bank of Mum and Dad
Average Age of First Time Buyer
Yet, the vast majority of First Time Buyers are not afforded this luxury, so that their options are restricted to saving for a deposit or waiting for an inheritance.
The average age now of a first time buyer is now 38.
Government's NewBuy Scheme for First Time Buyers:
Hence the reason this week for the government's intervention to try and resuscitate this ailing sector. The government first heralded a scheme to help first time buyers in November 2011.
The government will also point to previous assistance for first time buyers by the temporary "stamp duty" holiday which ends on 24th March.
This scheme seems to have coaxed First Time Buyers out into making their first step on the housing ladder. Figures show loans to first time buyers were 7% higher in December 2011 than in November 2011 and 14% higher in December 2011 than in the same month in 2010.
How the NewBuy Scheme Works
Builders and Government (i.e. taxpayers) will act as co guarantors on new homes including flats.
First Time Buyers ( although people wishing to part exchange for a new property may qualify) will get access to potentially 95% of the purchase price of their new home with both builders and the government giving a safety net in the form of a mortgage indemnity scheme.
The scheme will be limited to properties up to £500,000, and must be for a main residence rather than a second property or one which is intended to be let out.
The scheme will not include shared equity or shared ownership arrangements.
The catch or limitation of the scheme depending on your point of view is that it only available for new builds.
Churlish to Criticise?
Any help for the beleaguered first time buyer should be welcomed.
Grant Schapps the Housing Minister stressed "...the government [is not prepared] to watch an entire generation of people be locked out of the housing market when they can afford proper mortgages"
Critics of the mortgage indemnity scheme have been quick to point out that the scheme has had a lukewarm response from Lenders and that there will be only a few such mortgages available straight away. The Labour shadow housing minister has suggested that it will be Builders who will benefit most and that such artificial meddling in the housing market is again stirring up trouble for the future.
What are the pitfalls for First Time Buyer under the scheme?
There is normally a premium attached to buying a new home of between 5 -15% depending on availability and desirability. This means that for First Time Buyers to achieve the same or a higher price on sale, house price inflation would need to kick in; something which is unlikely to occur for most parts of the country for a few years yet.
First Time Buyers cannot then sell to another First Time Buyer and move up the housing ladder as easily as their property will not, by definition, qualify for the mortgage guarantee scheme.
First Time Buyers may therefore be denied selling on for quite a few years to come and there may be the risk of negative equity if the housing market falters again
Closed chain of transactions:
The other problem for the housing market is that a valuable First Time Buyer is taken out of equation for the rest of the housing market.
We and other Conveyancers have noticed that more chains have become completed in the run up to the March 24th deadline with the added impetus of First Time Buyers. Many chains have remained incomplete until the First Time Buyer arrives at the bottom of the chain to kick everything off.
There is no benefit to the general property market where the transaction starts and finishes with the First Time Buyer and the Builder.
Will Stamp Duty Holiday be extended?
The Stamp Duty holiday on properties up to £250000 ends on 24th March i.e. First Time Buyers must have completed their purchase by that day rather than merely exchanging contracts by that date.
The timing of this new government initiative, limited as it may be, could signal that the government will not extend the holiday in the budget later this month.
This new initiative may be a sop to soften the bad news.
Snakes or Ladders? Time Will Tell
The winners in the short term will undoubtedly be the builders who will find a more enthusiastic market for their starter homes.
First Time Buyers with a 5% deposit will be enfranchised once more albeit with a narrow range of new builds from which to choose.
But, most young people in the UK are still hard-wired into the dream of home ownership.
In the long run as the demand for housing will always out strip supply, property ownership will continue to be both a practical ideal and a viable long term investment
Let's not be too critical of a scheme to help realise those dreams, but equally the scheme will not have the boost to the housing market that many would have hoped.
For some the NewBuy scheme will be a good buy and will be eager to participate.
For the second time buyers and the rest of the market who may have been denied access to mortgage funds to help their next move, they may well feel that they have been unfairly by-passed by the NewBuy scheme
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