HELP TO BUY WON’T HELP THE AVERAGE FIRST-TIME BUYER (November 2013)

I’ve been keeping a keen eye on the news and reaction surrounding the second stage of the Governments Help to Buy scheme. I’m interested on both a professional and a personal level; personally I hoped it would offer an affordable route into home ownership with a small deposit.

Unfortuantely, it offers no more than any other 95% mortgage, i.e. high monthly repayments. Rather than stretch myself to my financial limit just to achieve the dream of home ownership, I have decided to continue renting and saving until I have a larger deposit to ensure I can access an affordable mortgage.

Whilst some may consider rent as ‘dead money’, what I pay in rent is broadly equivalent to what I would pay in mortgage interest on a 95% mortgage and I think that interest is truly dead money (at least I get something in return for my rent). In the mean time, whilst a homeowner would make capital repayments, I will save as much as I can but with the flexibility (which you don’t get with most mortgages) to save a little more or less each month to suit my situation.

Last week Priced Out Uk (the campaign for affordable house prices) released some research which demonstrates many others will be better offer renting and saving rather than buying a house using the Help to Buy scheme:

Interest rates are so high under the Help to Buy mortgage guarantee scheme that the monthly repayments for the average first-time buyer in England and Wales with a 5% deposit are more expensive than the monthly rent on an average home – by between £26 in the North East and £296 in London.

This means that it would be cheaper for people with a small deposit to continue renting and use the difference to keep saving – unless house prices rise by more than is predicted. Depending on the region, house prices would need to rise significantly – by 6% per year in the North West, by 34% in the South West and by 28% in London – for it to be worth using Help to Buy now. Despite this, PricedOut warns that the government is putting families under pressure to get on the ladder by taking on unaffordable levels of debt.

As an example, the average rent in London is £1141 per month. An average first time buyer in the capital using Help To Buy can expect to pay £1437 per month, based on average price of a first home of £256,000, a 5% deposit of £12,800 and an interest rate of 4.99%. With the prospect of the Bank of England base rate increasing, repayments will only increase in future. Instead, by saving the difference someone in London considering Help to Buy could instead increase the size of their deposit by an average of 28% over the course of a year.

Monthly repayments of a Help to Buy mortgage are around 40% higher than those for a typical 3.8% mortgage with a 25% deposit.

PricedOut spokesman Dan Wilson Craw said:

“This analysis suggests that Help to Buy will not help the average first time buyer, despite the government’s insistence to the contrary. When tenants see house prices rising they will feel pressure to take advantage of a 95% mortgage, but in doing so, many will find themselves overburdened with debt and will be paying vastly more than they would in rent, particularly in the South. And that’s even before you consider the impending interest rate rises a few years down the line.

“The millions of us renting want to be able to buy our own home eventually but, with house prices too high, all David Cameron and George Osborne have offered us is a Ponzi scheme to pull the wool over our eyes and help inflate the value of their London property portfolios even further. Continuing to rent and save appears to be the better option for most tenants.

“Instead of showering us with debt, the government need to make the actual houses cheaper and the only way they can do that is to build more of them.”

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