Is There A Dark Side To The Help-To-Buy Scheme?
The Government’s Help-To-Buy Scheme was intended to allow first time buyers to get on the property ladder with the hope that this would kick start the UK property market and it appears to be having the desired effect with increasing property transactions and the slow rise in property prices.
However, the Government intervention in the UK residential property market could have disastrous consequences for property owners and could even cause another property bubble.
The Government are spending huge amounts of money to aid first time buyers to get on the property ladder by offering low deposit, high loan to value, mortgages that are underwritten by the Government, effectively giving them a second charge on the property for a period allowing the owners to repay at a set rate per year.
Property owners will pay two repayments at once, paying off the Government loan as well as the interest on the capital of the mortgage and this could spell trouble in years to come if there is another dip in the economy.
However, the Government will effectively own part of all properties purchased through the Help-To-Buy Scheme and if things get economically tough for them later on, there is nothing to stop them from calling in the value of the portion of the property that they own, requiring the resident property owners to stump up the money to pay off the loan immediately, face increased repayment costs, or worse, face compulsory repossession by the Government.
There is no denying that, in the short term, the Government initiative will give the property market a much needed boost, but what happens when the scheme ends?
The Government will pull out of the scheme when they feel that the UK economy is strong enough to continue growing without political stimulus.
However, interest rates and property prices are inversely correlated, so when interest rates go up, property prices go down, and vice versa. So there is the likelihood that once the Government stops rates being held artificially low, it could create chaos and property prices could plummet as interest rates rise. This could leave property owners who purchased property using the Help-To-Buy scheme financially vulnerable.
The value of the property may go down but the amount they owe the Government won’t and there is every possibility that they will not be in a position to pay off the Government loan, leaving them effectively stuck in double trouble with negative equity.
I have no idea if this pessimistic view will ever happen and maybe I am cynical for even thinking it, but am I alone?
There are still many thousands of first time buyers out there who are desperate to get on the property ladder, but not all of them are so gullible. Many are still in the process of saving as much as they can in order to buy in the old fashioned, traditional, higher deposit, lower loan to value method, because they too, don’t trust the Government.
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