Devil is in details of deposit scheme

THE Government has launched a scheme that is designed to help mainly 100,000 first time buyers over the next three years. The scheme only requires a five per cent deposit on houses and it is available to borrowers who buy properties up to a maximum value of £500,000.

This is the government’s second attempt at moving the housing market forward with the removal of the stamp duty concession for first time buyers in March. They acknowledge that this was not a success so are hoping for better luck this time.

I think the mortgage companies acknowledge that the last four years have been particularly difficult for first time buyers as they have had to stump up deposits of 10 per cent to get on the housing ladder. This contrasts to the boom market conditions where 95 per cent loans were standard and mortgages of 100 per cent plus were commonly available.

On the face of it the government initiative should be welcomed, as first time buyers who do not have family assistance with the deposit will have to save up for an awfully long time. However this initiative applies to new build properties only and as yet only three lenders: Barclays, Nationwide and Natwest, are taking part in this plan.

Also, very few house builders have as yet registered for the new buy scheme. The reluctance to register may be down to the fact that both the government and the house builders have to contribute to a fund to cover a limited amount of insurance losses, which is around 10 per cent of the loan.

After this 10 per cent has been covered, if values fall further then unfortunately lenders have to carry the can. As lenders have been very reluctant to lend high percentage loans on new build property in the last few years, you can understand their hesitation in joining the scheme. This is particularly true for new build flats that have endured significant falls in value in the last few years and have contributed to significant losses for lenders.

If the scheme does go wrong I believe that ultimately losses will not be borne by the Government, lenders or the house builders, but, in the main, first time buyers. Most are unlikely to trigger potential losses for the scheme’s backers by handing back the keys if negative equity appears.

They are aware if they did this in today’s lending climate they would be banished from home ownership for decades. So they would become trapped in their own homes that may have become unsuitable for them. The only way out for many would be to save for another deposit and become a forced landlord and let out their first property, which would appear to defeat the object.

I find it surprising that the Government is asking taxpayers to stump up for this scheme and yet are not allowing it to benefit existing homeowners who may be trying to sell. I understand that they want to assist the economy and they feel that they should target house builders.

But once a new property has been bought the chain ends. Would it not be more beneficial to open this scheme for all houses, as it could be argued that a housing chain would develop with each 95 per cent mortgage completed, that arguably benefits the economy more.

However, if you like new properties and feel that new buy is for you then make sure that you do your homework before purchase. I would advise that it is crucial to compare the new properties with the second hand equivalent and to not pay more than what other properties go for in the area, because when you sell your property it will be second-hand. Also, try to buy a property that you can grow into, with perhaps you looking ahead for up to 10 years. These actions should lessen the chances of disappointment.

Otherwise keep saving and access a wider market as there is no great hurry with house prices in the North West having fallen 3.5 per cent in the past year.

Kieron Bassett Financial Services has two independent financial advisers who specialise in mortgages. Call 01524 832057, email info@kieronbassett.com or visit www.kieronbassett.com.