There are clearly signs that the
property market is recovering, with the Royal Institution of Chartered
Surveyors reporting that demand rose to its highest level for more than three
years after the April launch of Help to Buy. New buyer inquiries were at their
highest level for more than three years, and the scheme was starting to make an
impact, the institute said.
However some of the methods developers
are using to market their properties to first-time buyers who might be eligible
for the Help to Buy shared-equity programme are being called into question.
What is the Scheme?
Under the scheme, which is expected to
trigger 74,000 sales, the taxpayer provides an interest-free loan of 20pc of
the purchase price for five years, to enable a borrower to buy a newly built
property. Home buyers still need a 5pc deposit, but this additional loan should
enable them to buy a property they couldn't otherwise afford. Help to Buy
mortgages can be used on properties valued up to £600,000.
Participating mortgage companies will
then grant an advance of the remaining 75pc of the value. After five years, the
homeowner has to pay interest on the outstanding 20pc at a rate of 1.75pc,
although this will rise by inflation plus 1pc annually thereafter.
However, it has been reported that
developers are marketing their properties at prices 20pc below the correct
asking price, implying that the equity loan is a discount or free gift.
A property for sale by a certain large
developer, for example, priced at £439,500, was also advertised separately at
£351,600 – indicating that the property was cheaper than it actually was.
Slicing money off the price implies it is a gift from the Government. It
is not. An equity loan is precisely what it says it is. It is a loan that has
to be repaid. This may encourage people to take on debt, which is not
understood, or to overstretch themselves and buy properties bigger than they
can afford.
New homes tend to be more expensive.
According to the latest report from Halifax, the average cost of a newbuild
home is £233,822. This compares with the average property price of £166,000 in
April.
Indeed, a large section of the mortgage
market has turned its back on the new shared-equity scheme. Only Halifax and
NatWest, both part-owned by the Government, have embraced the scheme
enthusiastically, although Woolwich is also offering Help to Buy loans.
So what are the pitfalls of this scheme?
· You
can participate only if you do not own any other property.
· If
you want to buy the Government out, you can do so, but there will be costs. You
can increase your equity, but only in 5pc slices. Each time the property must
have an independent valuation, which you will have to pay for.
· You
may also face problems if you want to extend or alter the building, as you have
to seek approval, which may not be forthcoming. Increasing the value of the
property through a large extension can make subsequent equity valuations
problematic.
Advice
· Buying
a new property means you will be invariably be paying more for the property
than the equivalent second hand property so make sure you look to negotiate the
price down.
· Look
to work out how much you will paying under the scheme and the mortgage in 5
years time – will you be able to afford it.
· Don’t
be drawn in by misleading sales talk.
· Remember
it will be expensive to increase
your equity in the property.
Morgan Jones and Pett 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
