Help To Buy – Two steps forward one step back on the Property Ladder?

The difficulty for First Time Buyers in getting that first step on the property ladder is well documented; the price of homes. The Independent reported in April 2018 that the average house price is now up 8 times on the average earnings. Grim reading for most, and why schemes such as Help to Buy ISA’s, SDLT breaks for First Time Buyers and now Shared Ownership Purchasers are a welcome relief to many looking to purchase their first home. Is the Help to Buy loan really the silver lining in the gloomy cloud of the property market for First Time Buyers? Whilst it offers the additional 5% required to meet that first rung on the ladder is it a false start? 

Home moving company Reallymoving.com have suggested that Help to Buy loans could be as problematic as PPI claims and just as prevalent reporting that 70,000 First Time Buyers could be effected. The market research carried out shows that those using Help to Buy Loans paid on average 8% more for their homes, than those who did not, meaning that the short term gain is actually a loss in the long run. Clearly if there is more debt to pay off then when it comes to selling your property there becomes a real issue in terms of assessing what it is worth. The risk is that your home simply isn’t worth what you have paid for it and therefore you end up having to pay to sell your home.

The scheme works on the basis that you can borrow up to 20% of the property value and you don’t have to pay any of this back for the first 5 years. Subsequently you pay 1.75% for 5 years and thereafter 1% above inflation. Given you can only pay this loan back in either 50% increments, or wholly, and the average Help to Buy loan is  £56,000.00, not many first time buyers are going to have that kind of money. It therefore begs the question; is the Help to Buy loan scheme actually only serving to increase property prices artificially in order that these first time buyers actually have sufficient funds to pay them off!

The Help to Buy loan’s conditions make it very burdensome to pay back, it is not possible to pay in monthly installments, or alongside a mortgage or similar, it must be paid in large lump sums which simply do not suit its target market. The Government and Help to Buy agencies should perhaps realign the Help to Buy Loan with its intended audience to make a more effective and worthwhile product. The success of the Help to Buy loan is that it has helped over 183,000 first time buyers buy their first home, but unfortunately for those in this scheme the worst may indeed be yet to come.

Thomas Barnes  - Trainee Solicitor 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Help to Buy ISAs - Destined to fail the first time buyer

There is  a great deal of buzz surrounding the Government backed Help to Buy ISA Scheme ( available since the 1^st December 2015)  and in this article I look to explore the 'ins and outs' of the scheme as well as assessing whether it is likely to be successful.

How does it work?

You open an ISA account and the Government will top up your savings by 25% according to how much you add to the account.

You can add in the first month £1200 but there after you can only add a maximum of £200 per month.  You will only be entitled to the Government bonus once you have accumulated £1600.

The maximum amount you can save in a Help to Buy ISA is £12,000.

So the minimum Government bonus is £400 ( once you have reached the minimum amount ) and £3,000 if you accumulate the full 12,000 ( which will take around four and half years).

Help to Buy ISAs are available to each first-time buyer, not each house, so if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 towards your deposit.

Your Government bonus will go straight to the mortgage lender. It doesn’t sit in your account, it earns no interest, and you only get it if you buy a home. If you don’t decide to buy a home nothing apart from the bonus is lost since you can still subject to notice requirements of the supplier of the ISA, withdraw the savings.

Who qualifies ?

You need to be a first-time buyer and must be aged 16 or over.

It can be used to buy any home worth under £250,000 (or under £450,000 in London). It will not be available to those who wish to buy a property to let or an overseas property.

You can use a Help to Buy ISA with any mortgage.

The scheme is limited to one Help to Buy ISA and you can’t open a Help to Buy ISA and a normal Cash ISA in the same tax year.

The ISA will only be available to open until 30^th November, 2019 but if f you opened your Help to Buy ISA before then you can keep saving into your account. You must claim your bonus by 1 December 2030.

Does the Help to Buyer ISA represent a good deal?

According to The Money Advice Scheme it is:

 ‘…………..a no-brainer if you’re a first-time buyer saving for a mortgage deposit. You can earn up to 4% interest tax-free and then the state will add 25% free cash, and it could be £1,000s, on top of what you save’

So what are the drawbacks?

In truth there are not many.

If you are looking to purchase now or within the immediate future before house prices begin to accelerate further Help to Buy ISA  is not really going to make a big difference. If you were to start an account now and run with the £1200 initial deposit you could be eligible for the tax free bonus of £400 within 3 months of opening the account.

The bonus cannot be used to pay other costs, such as legal fees. It can only be used towards the purchase price.

You may find it difficult to find a conveyancer who is prepared to handle the conveyancing of a property which is funded in part by your ISA savings and the government bonus.  This is because the government as you will see below has limited the fee a conveyancer can charge for the extra work to £50 plus VAT.   Some conveyancers may take the view that the fee is unlikely to cover the actual work involved and decide not to take this work on.

What is the role of the conveyancer?

The solicitor or conveyancer will make the application for the bonus on behalf of the client, confirm that the client has declared their eligibility to receive the bonus and confirm that the property being purchased meets the eligibility criteria. This involves submitting the relevant documentation, including a payment request, and, once received, applying the bonus funds towards the purchase of the property.

Solicitors and conveyancers may charge the client up to £50 plus VAT to fulfil their role as part of the scheme.

To be able to act for clients the conveyancer must register with the Scheme.  This involves an application and vetting process which is to be handled by a third party – Lender Exchange.

Once registered the conveyancer for his or her £50 will be required to do the following.

Firstly to make the bonus application on behalf of the client, and confirm that the client  has declared their eligibility and the property being purchased meets the eligibility criteria.

This involves sending an application for the bonus to the Administrator, submitting the relevant documentation to the Administrator, submitting a payment request following approval, and holding the bonus to apply to the purchase of the property.

The conveyancer is also required to verify that the client is acquiring an eligible interest in land, that the acquisition is funded by a non-buy-to-let mortgage (unless exceptions apply) and that the value of the property is up to £250,000 or £450,000 depending on the location of that property. 

If the conveyancer has reason to believe that the client  is not eligible for a bonus, he or she should not proceed with the bonus application.

It is said the process will be simple and straightforward. Only time will tell.

Some questions

A cash free bonus can only, on the surface, represent a good deal for a first time buyer,though limiting the amount of the monthly contribution and delaying for four and half years the opportunity to purchase a property with the full bonus, must beg the question whether the benefit  of the bonus will be lost given the current rate of house inflation.

On the same note and given the figures are not house price index linked how many properties with a property tag of £250,000 and less will be available in four and half years’ time?

Applying an arbitrary cap to the extra-legal fee a conveyancer can charge, without any apparent engagement with the industry and regard to the amount of extra work involved, is unlikely to win favours and could lead to clients finding it difficult to find a conveyancer willing to assist with a purchase.

Conclusion

This may appeal in main to parents who are keen to find a tax free vehicle for assisting their children with their savings to be used towards the purchase of a property in the future.

I question however whether it will have wider appeal and indeed value unless the bonus is linked to the  House Price Index and the Government does something soon about making more affordable homes available for first time buyers.

As for what can only be described as a token payment to the conveyancer, it is clear once again  the conveyancer has been chosen as easy prey to subside the administration of the scheme, especially when you consider how much £50 plus VAT will be ‘worth’  in 2019/20 when, if successful, the system will kick in.

At present this represents nothing other than a political murmur falling well short of what is actually required to provide real help to the first time buyer.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Will the Mortgage Guarantee Scheme trigger a 'Boom and Bust' legacy for the Conservative Party?

The mortgage guarantee scheme is designed to help first-time buyers and existing property owners move up the housing ladder providing borrowers with a 5% deposit the opportunity to buy property worth up to £600,000.

The Government will guarantee up to 15% of the loan at a cost to the lender, allowing the borrower to access cheaper mortgage deals.

This differs from the first stage of Help to Buy.   That scheme allows people taking their first step onto the property ladder to borrow up to 20% of the value of a new build home from the Government, interest-free for the first five years.

Borrowers need a 5% deposit and must take out a mortgage to cover the remaining 75% of the cost of the property.

After the five-year interest-free period ends, borrowers will be charged a fee of 1.75% of the loan’s value. This fee will increase every year at 1% above inflation.

These fees only count toward the Government loan and come on top of the mortgage repayments. Borrowers must pay back the equity loan when they sell the home or at the end of the mortgage period - whichever comes first.

The mortgage guarantee scheme  - Help to Buy 2 - is available to both first-time buyers and existing homeowners buying new build and older properties.

Borrowers will need a 5% deposit, while the lender will be able to buy a guarantee from the Government covering up to 15% of the value of the property.

Both phases of the scheme are available on properties worth up to £600,000.

So what are the pitfalls?

If house prices fall, hundreds of thousands of buyers on the scheme could be left in negative equity.

If a property is repossessed because of default of the borrower, the Government will guarantee 75% of the part of the loan above 80% of the loan to value. The borrower will meet the other 25%.   If there is insufficient funds to meet the loan the borrower will still be liable to the lender for the whole of the loan even the part guaranteed by the Government.

The other key question is whether mortgages offered through the scheme will actually be any cheaper than those on the market at the moment, and whether enough lenders will take part.

Banks need to pay a charge to have their mortgages guaranteed by the Government, so are likely to build this sum into the total cost of the loan.  It is likely that a sum equivalent to 1% of the value of the property is to be placed into a reserve to cover defaulters.  The cost of this will be passed onto the borrower.

Are these schemes the real solution to Britain’s housing crisis?  Will they not keep house prices artificially high, giving people no choice but to take out large loans that could run out of control if interest rates rise?

Cambridge University study found last year that although shared ownership schemes allow them to buy their first home, they do nothing to help them buy their next home.

Cynics will say all of this amounts to nothing other than political engineering reminiscent of the type of policy that led to the ‘boom and bust’ years.  Ironic in some way given this is a Conservative policy.     We will just need to see what time brings. 

MJP Conveyancing  are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk