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Help to Buy – a “mortgage debt escalator”?

22nd November 2013

Help to Buy – a “mortgage debt escalator”?

By Martin Wicks

Like all the other coalition government housing policies Help to Buy is already a resounding success. It must be, the government says so. In a press release it boasts that HTB “puts a new generation of home owners on the housing ladder”. Well, not exactly a generation, but 2,384 applications. According to the government the average lending taken out by these people is “around £155,000 for houses worth £163,000.” They face an average monthly payment of £900 and, apparently have an average annual household income of £45,000.

Of course, as well as the 5% deposit these lucky people owe the government 20% of the price of the property, as well as the 75% they owe to the mortgage provider. Although the government loan is interest free for the first 5 years, after that there’s a sting in the tail which includes an annual payment which will increase each year above the level of inflation.

Unlike a mortgage payment, where you know what you owe, if the value of the house increases then so will the money the buyer will owe the government. You might describe it as a mortgage debt escalator. When you sell the house or reach the end of the mortgage term the tenant will have to hand over 20% to the government, whatever the value of the property. The government press release has the audacity to call this “supporting responsible lending”. When interest rates rise many of these people may find themselves in difficulty. Around one third of households are spending over a third of their income on housing, and that is with historically low interest rates. Add to the mix a decline in the value of wages and rising prices and you have a potential social disaster.

PricedOut, a national campaign for affordable house prices has done some research which shows that first time buyers would be better off renting that taking the risk of leaping into bed with the government. A PricedOut spokesman 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 rates a few years down the line.”
In fact it’s a 75% mortgage, its just that the buyer will not have to start paying for the 20% borrowed from the government until after the first 5 years.

Our well informed Prime Minister seems to think that “Most Help to Buy applicants are first time buyers, young and have a roughly average household income”. In fact £45,000 is certainly not an average household income. According to the government’s own statistics the average was £31,477 in 2011-12 (Office of National Statistics).

Help to Buy mark 2 is not just directed at first time buyers or else it would not have an upper limit of a £600,000 home. A quarter of the applicants already own a home. As PricedOut says, “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.”

Everybody and their grandmother is warning that without an increase in new build then increased market activity will simply drive prices up further, and home ownership will be further beyond the reach of more people.

Behind the false propaganda of the government lies the reality of a decline in net additional homes built in three straight years . These statistics mean that the gap between new supply and what is needed has increased. This is the reality at the heart of the government’s disastrous housing policy. Help to Buy is fuelling unsustainable lending by helping people to get mortgages that they cannot afford; the coalition equivalent of the sub-prime mortgage. Anybody looking to buy using HTB should look very carefully before they get on that ‘mortgage debt escalator’. They may live to regret it.

What is needed is an increase in housing supply, including Council house building , which is the best means of providing genuinely affordable homes for rent. This would help to bring down house prices for those who want to buy.

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