This is a letter to the Swindon Advertiser
If an offer appears to be too good to be true, it probably is. As they say, caveat emptor – buyer beware. Anybody looking at the government’s ‘Help to Buy’ scheme should certainly beware. Ostensibly aimed at overcoming the problem of unaffordable down-payments for mortgages, it offers one at as little as 5%. However, all it does is put off the evil day until later. The ‘gap’ between that and the 25% down payment common today, is ‘bridged’ by an ‘equity loan’ from the government. So the buyer will owe the government 20% which has to be paid off either when the house is sold, or when the mortgage falls due.
One of the selling points of HTB is that the ‘equity loan’ has zero interest for the first five years. However, like the infamous ‘sub-prime’ mortgages, there is a sharp sting in the tail. Firstly, from year six the buyer will have to pay an annual fee of 1.75% plus RPI, plus 1%. This, of course, is on top of the interest paid on the mortgage.
Secondly, the government has set up a nice little earner, on which there has been little publicity. Whereas with a mortgage you are borrowing a fixed amount, with HTB, you can end up paying more to the government. If the value of your property rises, then you will have to pay 20% of the value of the house whatever it is. So, for instance, if the value of your house rises from £150,000 to £200,000 you will have to pay the government £40,000 instead of £30,000.
Stage 2 of HTB offers a guarantee to the financial institutions that give out the mortgages. This is a guarantee to the lenders which will compensate “for a portion of the net losses suffered in the event of repossession”; a guarantee worth up to 15% of the loan. The fact that a government guarantee is being offered is a reflection of the risky nature of the loan.
HTB is essentially a means of helping people who cannot afford a mortgage to get one. In the words of Financial Times commentator Martin Wolf
“The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so.”
Borrowing based on historically unprecedented low interest rates can be risky. If interest rates rise, as they must at some stage, then those taking up HTB on the basis of the attractive 5% down-payment, could find themselves in trouble, especially if this is combined with climbing inflation They will owe the government 20% and it could easily be an albatross around their necks.
The crisis of affordability for would-be house buyers is not just owing to the down-payment necessary today. It is only during the housing boom that the 100% mortgage (and even the 125% mortgage) became common. The fundamental problem is that house prices are too high, continuing to run ahead of earnings. If HTB helps to drive up house prices even further then more and more people will be ‘priced out of the market’. According to the Department of Communities and Local Government, in Swindon, even the lowest quartile house price, is over 6 times the annual income of the lowest quartile earners.
HTB is not just aimed at first time buyers, or else it would not be offering support for people rich enough to buy a house worth £600,000. At the very same time as the coalition is taking up to 25% of Job Seekers Allowance recipients’ pittance of £71 a week, for ‘spare bedrooms’, it is offering up to £120,000 in state support for house buyers.
We certainly know where the priorities of the coalition government lie and whom it supports. Whilst stigmatising benefits claimants it is offering guarantees to the very institutions that caused the crisis.
Secretary, Swindon Tenants Campaign Group