In the current climate where the housing crisis and the vicious circle of private renting have conspired to create an air of desperation amongst first time buyers, schemes such as George Osborne’s Help to Buy or Shared Ownership schemes have been touted as the answer.
With many young people unable to save for a deposit due to high rent or simply not earning enough, something has got to give. On the face of it, these schemes provide a solution for those who are struggling to get their foot on the ladder. However, is it as good as it’s cracked up to be?
Shared ownership schemes have been around since the 70’s and are aimed at helping people on low incomes who earned too much to qualify for social housing. While it has always occupied a small part of the housing market since then, it has come into its own in recent years.
Smaller deposits and smaller mortgages might sound like a fair trade for owning slightly less than the full share of a property. After all, isn’t owning part of a property better than nothing?
One of the main benefits of the Help to Buy scheme is that after no paying interest on your equity loan for five years, the initial rate of interest (1.75% in the sixth year) is generous considering the current market. However, although you will benefit from five years without interest and a low rate in your sixth year, the interest applied to your loan will then increase by 1% every year plus any RPI increase. These creeping costs could end up causing problems to deal with further down the line. It’s also worth remembering that should RPI increase dramatically, so could the interest applied to your loan.
Taking this into account, the amount you will ultimately need to repay is not fixed and will fluctuate with the market value of your property. This means if your house has risen in value you may be eligible to pay significantly more than you originally borrowed.
Another pitfall of these schemes is tied into the properties you can purchase which are often new builds. Many young people have reported that there are often discrepancies between the asking price and the value of the properties. Katie Webb of Shelter told The Debrief this week that “there is a premium on new builds and [developers] have a bit of a captured market because of this”. Effectively this means there is less room for negotiation which is leaving first-time buyers on the back foot.
Some property experts even claim that the Help to Buy scheme has started to inflate house prices. The concern here is that it is causing a housing bubble that will burst when the scheme ends, leaving a vast number of buyers in negative equity.
Whilst these schemes have answered a clamouring of young people to get their foot on the property ladder, they are not without their pitfalls and should be carefully considered before you enter them.
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If you do decide to purchase a house on one of these schemes, don’t forget if you need to sell your house fast We Buy Any Home is always here to help.