Help to Buy Homes and the Property Ladder: Getting On and Staying On?

(Image Source: http://www.geograph.org.uk/photo/82859)

– Jade Rigby (LLB Law, Newcastle University) j.k.rigby@newcastle.ac.uk

“For a man’s house is his castle, et domus sua cuique est tutissimum refugium [and each man’s home is his safest refuge].” – Sir Edward Coke

Of course, in today’s modern society, a homeowner does not have to be male, but Sir Coke does make a poignant point. As a society, we aim to own our own property – whether it be a cosy flat or a large house with a sprawling garden, the pressure is on for everyone to move out of the parental nest and create their own home. This seems to be a view which has survived the economic crash in 2008, but it has been affected by the spiralling financial crisis. There are over 2 million unemployed people in the UK, but the average house price between April and June 2013 was just under £250,000. Rising tension between the ideals of society and fiscal reality has led the Government to unveil the Help To Buy scheme this year in order to help people get on to the first rung of the property ladder.

So what exactly is the Government offering? Well, the scheme has four separate branches, which encompass different areas of the property market; Help to Buy equity loans, a shared ownership scheme, the NewBuy scheme, and the Help to Buy mortgage guarantee.  The mortgage guarantee is arguably the most controversial branch because it enables people to purchase a property with a deposit of just 5% of the purchase price. The Government provide a five-year interest free loan for up to 15% of the purchase price, which guarantees the mortgage with the lender. Interest is only charged on the loan after the sixth year. Traditionally, most mortgage lenders have asked for deposits between 10-20%, so the Help to Buy scheme is a radical step for many of those who have been unable to meet these requirements. To qualify for a mortgage guarantee, the home you want to buy must not be a second home, or be subject to shared ownership or shared equity, and you cannot plan to rent it out after purchase. Finally, the home must not sell for more than £600,000.

The mortgage guarantee does have many procedural advantages. Although there is a financial cap, the guarantee, unlike the NewBuy scheme, is not limited to particular new builds. This gives the public a wide choice of homes from across the property spectrum. For those hoping to climb further up the property ladder, this is also a great opportunity. Older builds often increase in value, whereas new builds may simply hold their price. Furthermore, potential candidates for the scheme can directly apply to some banks such as NatWest, RBS, Bank of Scotland, HSBC or Halifax. Approaching a mortgage lender can be an intimidating task, so it is particularly advantageous that popular banks are involved with the scheme because a large proportion of the public will already be familiar with their local branch. Significantly, this is a positive step forward in tough economic times for those who want to move without the hassle of saving up a larger deposit amount, or for people trying to get on the property ladder for the first time. There is a hope that the scheme will kick start the construction industry, and fill the lack of affordable homes.

The question is, is this the correct step for the Government to take? Granted, the scheme may be rooted in good intentions, but the practicalities of the mortgage guarantee are causes of concern. 95% mortgages are a huge financial burden in an unstable time. Although there has been a fall in unemployment rates recently, this does not mean that the financial world has time to fall back and relax. Borrowing more than what can a person can afford was an underlying cause of the financial crisis, and there may be an argument that a 95% mortgage is setting the vulnerable up for a fall. Although there will be meticulous checks before a mortgage guarantee is granted, the public perception of banking does not project a trustworthy image.  It may be a case of ‘only fools rush in’ as, at the limit, a 95% mortgage could form up to £570,000 worth of debt. This of course affects the accessibility of the mortgage guarantee; those with a poor credit score, who are arguably the most vulnerable to the property shortage, will be excluded. It is very concerning that the shortage of affordable homes is being met through mortgage schemes. This approach seems to skim over the real issues; inflation, job stability, and the housing shortage.

Indeed, the reaction to the Help to Buy mortgage guarantee has been very mixed. PricedOut – a campaign for affordable house prices – slams the scheme as ‘Help to Sell’ instead of Help to Buy. The low deposit rate fuels concerns that the scheme will create a new housing bubble, which will allow homeowners to sell at inflated rates. Rising house prices and overwhelming levels of debt may prove to discourage the public from participating. This would completely undermine the entire point of the scheme – to help the vulnerable get on, and stay on, the property ladder. Legal mortgages, it must be remembered, include equitable rights for the mortgagor. The equitable right to redeem, and the right to possess, for example, may be considered as powerful tools in the event of someone falling short on their mortgage repayments. The mortgagor always remains the true owner of the property because, historically, mortgages were used for exploitation and extortion. The mortgagee also has duties to fulfil; they must act in good faith, and to attain true market value for the property if a sale is on the cards. These obligations and rights provide a substantial stronghold against potential exploitation stemming from the Help to Buy scheme. The mortgage guarantee has not overridden these equitable rights in any way, so it is possible that fears surrounding the expansion of the scheme are largely overstated.

Ultimately, we will have to wait for further analysis. The Government will make available up to £12 billion of guarantees to support the scheme during its three-year life, so there is huge potential for many people to take their first tentative steps on to, or up, the property ladder. The doom and gloom of the economic crisis is lifting slightly at the end of 2013, but only time will tell how the scheme will fare amongst the wider public and the mortgage lenders.