The Help to Buy package announced in his budget speech today by Chancellor George Osborne should be interesting news to anyone hoping to buy a home, not just first-time buyers.
But it’s ‘jam tomorrow’ for homeowners who want to buy an existing property rather than a new one, as the part of the package intended to help them will not come into operation until January next year.
The Chancellor has regrettably still not made any move to reform stamp duty land tax, despite repeated calls from many quarters.
Previous schemes to assist home-buyers have been largely targeted at first-time buyers, especially those wanting to buy new-build properties. As I have pointed out, this does nothing to help existing homeowners, who may want to sell because they need a bigger home, or who wish to move in connection with a new job.
New measures will help existing owners as well as first-time buyers
It seems that Mr Osborne has now realised the need to help the wider housing market and says the Help to Buy package will help those who want to get onto, or move up, the housing ladder.
Two schemes will be available, and while one is still aimed at those who want to buy new-build homes, the second is intended to help buyers of existing properties. Both schemes will only be available on properties with a value of not more than £600, 000.
The Chancellor has stated:
- Scheme 1.
- The present First Buy scheme for new-build homes, which has only been available to first-time buyers, will be extended from April 2013 to include those who already own a property.
- As long as a buyer can find a 5% deposit, they will only need to borrow 75% of the price on an ordinary mortgage.
- The government will then provide the remaining 20% by way of an equity loan, which can be repaid at any time, or on the sale of the property.
- Scheme 2.
- The second part of the Help to Buy package is a Mortgage Guarantee scheme, and will come into operation in January 2014.
- The guarantee scheme will be available to existing homeowners as well as first-time buyers
- It is targeted at homebuyers who want to purchase any property, whether new or old, but can only raise a 5% deposit.
- Provided buyers can obtain and afford a mortgage for the remaining 95% of the value of the property, the government will give a guarantee to the lender for 15% of the loan.
Anything which will help re-vitalise the housing market will be welcomed by homeowners and house-builders alike. Previous initiatives have been principally targeted at first-time buyers of new-build homes, and have done little to encourage movement in the market for existing homes. That is an important sector of the market as a whole – not everyone wants to or is able to buy a new-build home. Also those present homeowners who do want to buy a brand-new home will first need to be able to sell the property they already own.
However as the extended mortgage guarantee scheme will not come into effect until 2014 it will provide no immediate benefit for home-owners wanting to sell. And the fact that it does not give would-be buyers any additional financial help may mean that it will do little to boost the market next year.
A lot will depend upon whether would-be buyers are actually able to obtain 95% mortgages. Some will see this as a return to the bad old days when borrowers were encouraged to borrow far more than they could comfortably afford. No doubt much tighter lending restrictions will now apply, but that in itself could discourage potential purchasers.
No change for Stamp Duty
It is disappointing, but probably not surprising, that the Chancellor has done nothing to reform (or better still, abolish) stamp duty and has left stamp duty tax bands and rates unchanged.
Just recently a report published by leading think tank the Institute for Public Policy Research criticised stamp duty as essentially a charge on moving house, which may reduce people’s ability to move for work or encourage people to live in homes that are too large (or too small) for them. Stamp duty could therefore be adding unnecessary inflexibilities to the labour market and incentivising the inefficient use of residential properties. The report also said that many economists argue that it has no sound economic basis. http://www.ippr.org/publication/55/10503/property-and-wealth-taxes-in-the-uk-the-context-for-reform
While government initiatives aimed at helping all would-be buyers will encourage the housing market, buyers may continue to be put off by having to pay stamp duty on the purchase price. Some may ask themselves what is the point of borrowing money either on an equity loan or as part of a mortgage, when you might have to pay perhaps 3% or more back to the government straight away in the form of this duty?