I was going
to start this post differently.
In fact, I was going to write a completely different post altogether.
But I have just used Rightmove’s calculator on how Help to Buy (the mortgage guarantee scheme launching in January 2014) could help buyers. Having used the calculator I have just one thing to say: FREE MONEY
That’s how this scheme makes home buying look.
With just a £5,000 deposit you could buy a property for £100,000. Raise a £30,000 deposit and you could buy a property for £600,000. Which when I selected the exorbitant London area buys so many properties even the uber-powerful Rightmove search engine broke down and spluttered at the sheer choice available.
Stunned I was.
Unlike the Equity Loan scheme (launched April 2013) which only applies to new-build properties, the Mortgage Guarantee Scheme includes new and old properties. And there’s no complicated equity stake arrangements which would require the genius of Brian Cox to fathom.
This is purely and simply show you can afford the mortgage, get a 5% deposit and then hey presto you can buy your dream property for up to £600,000.
It’s that simple. No saving for years to get a big deposit – that’s where the scheme kicks in. The government will guarantee lenders against a fall in prices of up to 15% which will encourage lenders to offer more 95% mortgages.
So now you can take out a higher-loan-to-value mortgage than you would have ever thought possible. And the government will guarantee it.
Which I have to say is truly and utterly remarkable.
And reminds me so much of the high-loan-to-value mortgages which got us into this sticky, stinking financial mess in the first place.
Fortunately, and I mean fortunately people will not be able to use the mortgage guarantee scheme to buy second homes and lenders will be required to collect a declaration stating that the borrower has no interest in a property anywhere else in the world.
Which I believe is a really good thing. Because this has got to be for those home owners who need it – and I mean need it.
Personally I am divided on this idea. On the one hand, I think it’s fantastic to enable people to get on the property ladder and this scheme looks an absolute godsend for those who have yet to save sufficient deposit to do so. On the other, this scheme is creating more debt for people and encouraging them to spend more money they haven’t got and, by default teaching them there is no need to save for the future.
In truth I am concerned by the “instant gratification” mentality which pervades so much of our current culture. We are no longer willing to wait for good things to happen. We want good things to happen now. And we expect good things to happen now. We have been fed a stream of our lives as some sort of Big Brother montage. A tableau where everything we want now can happen now.
We demand it.
We expect it.
And as L’Oreal would say: “Because we’re worth it”.
Accepting what we can and cannot have has gone out of the window. Expecting what we should have and are entitled to is now the order of the day. Gone are the days when we “made do” – that was for our parent’s generation. That is not us. Us, we, you, me today, I deserve everything I want.
Now.
And that is the mentality which I fear the Help To Buy Mortgage Guarantee scheme encourages. There is such a thing (although it may sound old-fashioned) that you should work hard and heaven-forbid go without buying stuff to save money for the future. Because the simple fact is you cannot have it all.
This country is in mammoth debt. As at June 2013, the amount of outstanding personal debt stood at £1.425 trillion. People owe nearly as much as the entire country produced during the whole of 2012. And that is freaking scary.
And you know what else is scary?
Every 16 minutes and 26 seconds a property is repossessed.
Which is why I worry about these schemes from the government, because the truth is: it’s not free money. It is a loan. At some point in the future that money needs paying back. And this debt repayment seems to be something which so many people have glossed over.
There seems to be a national obsession with availability of credit to buy homes – but who is actually thinking about how this credit (which is actually debt) will be paid back? Because the one guarantee you can be sure of, is if you don’t make your payments every month the lenders will be coming after your home – regardless of any government scheme.
Smithy
Do you recall ‘Access’ cards? a forerunner of today’s Mastercard.
They had an advertising slogan ‘Take the waiting out of wanting’.
Same old, same old………..
Sam
We seem to have forgotten Guinness’s slogan “Good things come to those who wait”…
Richard Watters
I think making Help to Buy available on non newbuilds too from next January, on properties up to £600,000, is a good thing for many people, especially frustrated first time buyers, for the following reasons:
1. It gives first time buyers the chance to get on the ladder. OK, some will argue that we’re obsessed with property in the UK, and maybe so, but I know buying my first house was a big event, and felt like a big achievement, in my life. It gave me a feeling of worth and responsibility that I don’t think I’d have had had I rented forever.
2. First time buyers means second/third time buyers etc can move. Mobility is a good thing generally, people can move for work, create a better quality of life for their families, etc.
3. It leads (and Funding for Lending & Help to Buy on new builds has already kick started this) to house price inflation. Some would say this is bad for those who can’t afford to buy, even with Help to Buy. True, but the 5% deposit requirement means that people in employment with good credit records are now being helped so that they can now buy in most UK locations. If they still can’t afford to buy (for example, in London) then that’s the price they pay for choosing to live there.
4. House price inflation is good. The best thing for our economy is for a level of inflation that enables our debt to be reduced in real terms. At the moment there are a lot of people in negative equity. If they default in numbers, it will create economic and social issues. Much better for inflation/house price inflation to ease them out of the problem (exactly what happened in the nineties).
With reference to (Sam’s) points of concern:
a) If Help to Buy is going to be thrown at people like 100% mortgages were in 2006 and 2007, then this is obviously not good. However although the criteria aren’t finalised yet I understand that a good credit record as well as a 5% deposit will be required. This is exactly what was required of most buyers pre-2003, without creating a problem.
b) Size of loan will be a multiple of income and affordability will be assessed. So anyone wanting to buy a £600,000 home will need to be on a 6-figure salary unless they have a chunk of equity from a sale.
c) Despite all the economic issues repossession rate is low. Admittedly this is because of low interest rates and Lenders’ reluctance to repossess where there is no equity, and will rise if interest rates go up before house price inflation really kicks in. But Help to Buy is unlikely to result in a lot of repossessions in the future as long as lending is responsible. And I think it will be responsible.
The main reason Help to Buy is being extended to non new builds is because the Tories want to win an election in May 2015, make no mistake about that. But that doesn’t mean it’s not a good thing for existing and future home-owners.
Sam
Richard, thank you for taking the time for sharing your points. My main concern is with regards home ownership being the only goal touted that we should strive for. I personally believe that having a large mortgage (despite people being able to afford it on paper) seriously restricts people’s mobility and life chances.
I believe people who have large mortgages are often forced to stay in jobs they do not like and family circumstances which are inappropriate due to the financial pressures. This means, in effect, the freedom which should have been associated with home ownership becomes a prison. And a very expensive prison at that.
I worry that people take on mortgages and large levels of debt without actually properly thinking through the impact it will have on their lives. People who have smaller mortgages, I believe, have more freedom. This means they are able to pursue yearned for business ideas (which helps our economy more) and pursue new or alternative careers (which again, helps our economy more).
Having economic freedom, or rather not feeling overly burdened by financial pressures, is vital to the growth of our economy. It is also essential to the growth, happiness and well-being of us as people. It is for these reasons that I fear for people who take on so much debt – even if on paper they can afford it.
Richard Watters
I think we need to remember that people have choices – no one forces them to take on a big mortgage. I do agree that taking on the biggest mortgage you can get just because someone will lend you it isn’t usually the best option for people, better to take on a level of debt that doesn’t make you a slave to it. On the other hand is it really a bad idea to be stretched financially on your first home if that’s what is necessary to get on the ladder. I know I was stretched and interest rates rose a lot just after I bought my first home which meant I was pretty hard up for a couple of years. But a few years later after house prices had shot up and inflation eroded the debt it actually meant I was in a position to relocate (for work) to a more expensive part of the country.
Sam
My concern is that people are encouraged to take on debt in the hope that one day their property will be worth more. In doing so, they tend to value their property over themselves and their lives. This means real life-changing stuff such as starting a new businesses or re-training for a new career get put on the back burner for the sake of a property.
Richard Watters
Yes that does happen in the property-obsessed UK. Everyone has the right to choose but there’s no doubt we’re all influenced to some extent by the media and what’s going on around us. The answer to this of course is education – teach children about money, debt, interest, etc whilst they’re at school. The financial ignorance of most school leavers (and even Graduates) is unbelievable. The assumption from most is that if someone is prepared to lend them money then it must be ok to borrow it.