10:53 AM, 4th February 2016, About 9 years ago 8
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An article by Alex Caravello – MK Landlords Association
Is Help to Buy just a Government con?
To answer this question I thought I’d compare the true cost of the ‘Help to Buy Equity Loan’ scheme with the cost of renting a similar property long term.
INTRODUCTION
The ‘Help to Buy Equity Loan’ scheme only applies to new build properties. Typically, new build properties come at a premium of as much as 25% compared to similar second hand property. For this example we will assume the premium is only 20%. It is therefore in the buyer’s interest that house prices increase by at least 20% before they sell, otherwise they would be in negative equity.
This Government classifies ‘Affordable Housing’ as housing costing £250,000 outside of London (within London this figure increases to £400,000). We will therefore use the figure of £250,000 in this example.
New build property does not usually come with carpets, curtains, garden landscaping, etc and the capital cost of supplying these would typically be in the region of £5,000 plus.
One criterion of Help to Buy is that the buyer must put down at least a 5% deposit. The Government will then provide an equity loan of up to 20% and the buyer must be able to qualify for a mortgage of at least 75%.
For the purposes of comparing like-for-like, let’s assume that the 5% deposit is also borrowed at typical mortgage rates. It could be borrowed from the Bank of Mum and Dad as equity withdrawal from their own home mortgage and would therefore cost the typical mortgage interest rate.
The Help to Buy Equity Loan means that that the Government has a 20% stake in your property. If the value of the property goes up (which you need to avoid negative equity), then the equity loan goes up too, meaning that you will repay more than the original loan amount. Typical long term house price growth over the last 25 years (the typical mortgage term) has been over 250%, meaning that the original 20% equity loan will increase to the equivalent of 50% of the original purchase price over 25 years.
The equity loan is interest free for the first 5 years, then interest is payable at 1.75%, increasing annually by RPI + 1%. Current forecasts are for the RPI to be at 3.3% by 2021. This means that, if you took out a Help to Buy Equity Loan today, when the interest starts to become payable you would be paying interest on the equity loan of 1.75%, rising to 4.06% in the twentieth year, thereby an average of 2.91% over the remaining 20 year term. This is in addition to the (potential and necessary to avoid negative equity) rise in the value of the equity loan explained above.
Typical 25 year fixed mortgage rates are around 5.5%, with £1,000 mortgage arrangement fees. For the purposes of this example we will ignore any redemption penalties that would be payable to change to a different mortgage, or if the house is sold before the mortgage is repaid. A buyer typically also pays another £1,000 for solicitor’s fees, disbursements and valuation fees. Stamp duty is currently 2% from £125,000 to £250,000, so in this example would be £2,500.
Maintenance and repair costs are the responsibility of the home owner, as is buildings insurance. Typical costs vary, but a long term cost of around 1% of the original purchase price per year is typical. However, for the purposes of this example we will assume only 0.5%, as hopefully a new build property will suffer from a lower level of maintenance and repair costs than a second hand property (this is not necessarily true, but is an adequate assumption for illustrative purposes).
COST OF BUYING
What is true cost of buying a £250,000 new build home with a Help to Buy Equity Loan?
Capital Costs
Stamp duty £2,500
Solicitor and survey fees £1,000
Mortgage arrangement fees £1,000
Carpets, curtains, garden landscaping, etc £5,000
5% deposit £12,500
Total capital required £22,000
Interest on capital costs over 25 years £30,250 (typical loan interest of 5.5%)
Help To Buy Equity Loan Costs
Original 20% equity loan £50,000
Actual equity loan to repay over 25 years £125,000 (assuming 250% house price growth)
Interest on equity loan over 20 years £29,100 (assuming average 2.91% interest rate)
Mortgage Costs
Original 75% mortgage £187,500
Interest on mortgage over 25 years £258,000 (assuming 5.5% fixed interest rate)
Maintenance, Repair & Insurance Costs
25 year cost £31,250 (assuming 0.5% of original price)
TOTAL COST OF BUYING £683,100 (equates to £2,277 per month)
COST OF RENTING
The £250,000 new build home comes with a 20% premium; therefore a similar second hand property would be worth £208,000. Typical rental yields in the South East of England (excluding London) are around 5%, which equates to a monthly rent of £870. Assuming rents increase by the average 3.3% RPI used above, then a typical tenant would pay £424,000 in rent over 25 years.
A tenant does not need to spend anywhere near the same level of capital to rent a house compared to buying (say, £1,500 for a deposit and administration costs versus £22,000 to buy – and the deposit is returnable at the end of the tenancy).
COST DIFFERENCE
Therefore, the true cost difference between buying a £250,000 new build home with a Help to Buy Equity Loan and renting a similar second hand property is £259,100 more over 25 years.
Yes, the advantage is that you would own your home after 25 years, but at an extra cost of £259,100. This is all well and good, if you can afford to buy, but if not, why should renting – and saving £259,100 over 25 years – be seen as second best?
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John Constant
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Sign Up11:14 AM, 4th February 2016, About 9 years ago
Wow! some pretty big assumptions made there Alex!
One thing that you didn't seem to mention is what would the purchased property be worth after 25 years on a mortgage? Assuming 7%, which has been the typical rate of house inflation over the last 30 years or so, we would be looking at approximately £1.13M, even starting from your assumed discounted £208,000. More than makes up for the additional cost, don't you think?
Chris Byways
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Sign Up11:52 AM, 4th February 2016, About 9 years ago
This does not factor in the cost of moving house every 5 to 7 years, far cheaper if renting.
How does one factor the lack of mobility, or being able to swan off for a world cruise without financial commitment when buying? Or becoming single (or unsingle)?
Nor the risks of house price corrections, coupled with simultaneous job loss or illness leading to foreclosure leading to loss of deposit and creditworthyness.
Interesting starting point for statistical purposes, good to set out the 'hidden costs' of those too quick to knock competitive renting.
Recardo
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Sign Up12:38 PM, 4th February 2016, About 9 years ago
The government is only interested in SPIN, make something bad look good. They have probably brought todays housing problems on themselves but far easier to blame someone else.
Was the down turn caused by bad mortgages, I don't think so. I think it was caused by greedy bankers looking for their bonuses. Buying lumped up debt (not only mortgages) from others (who were making a loss by taking a risk) and hoping to make a profit from some of the good debt.
Their spin was people taking on mortgages they could not afford. At 90-95-100% LTV it was made to easy to get a mortgage.
Really, I never saw figures that said 300,000 out of every 100,000 first time buyers were reposed in every year since 1996 to 2015. So we should make mortgages harder, that will cure the economy.
What percentage of new mortgage defaulted in past years when borrowing up to 95% LTV. People do get in trouble same as renters, job loss, divorce, bereavement etc. But do you know anyone who would pay out thousands to get on the ladder and not do everything possible to pay their mortgage and loose their money? I don't.
Like others once on the ladder my concern was keeping the house. In my case (and other I know) there were no holidays, cheep old cars if any (not new ones on HP), no Cable TV, entertainment or eating out, and a host of other things.
The government response was make mortgages harder, forget the old rules of borrowing 3-4 5 time income. Now income less expenses. How much do you pay on gym membership (to try and save the NHS with good health), how much do you spend on holidays, entertainment, mobile phones, etc etc etc.
Wow some of these can be cut out or reduced, but I don't think they ask what reductions can be made. Joint income of 45k now reduced to 35k. although the mortgage rate is 2.5% stress test it to 6%. I remember taking my first mortgage in 1975 at about 7% and I did rise to 15% about 7-8yrs later, although now on one income and 3 kids to support we did not loose our house, but after cutting everything to the bone, and doing all the overtime I could we were left with abot £4pw disposable income! Sure other did the same, so the stress test did not take in the fact of inflation on wages, or the reduction of mortgage rates.
I started out employed and moved to self employed, if not for interest only mortgages (now removed) I would not have even got my first house at £9,950. The remortgage plus interest would have put the mortgage out of reach. Do away with government help and reintroduce this mortgage to get people on the ladder.
Bring back multiple incomes for mortgages, and self Certification. This allowed me to move to ever larger houses every 5 years.
I've only got 41 years of experience with housing, and mortgages and very good with a calculator, so probably not the right person to be chancellor. I've only got CSE's (1970) not a 2/1 in HISTORY.
After thought, I've advised friends and family on the best mortgages to go for, depending on fees up front. % rates and what the revert to, and what the monthly payment will be as they don't understand it and can't work the calculator. They can't see that the higher arrangement fee and survey fee more than wipes out the 0.2% less interest rate over the 2 year fixed. THEY have no clue on 20-40% government help, (save to buy) what it will mean in 5 years time when the 40% has to be repaid or interest added. WHY keep it simple when the government can say WE ARE DOING EVERYTHING TO GET YOU ON THE LADDER. Speak spin make it as hard and complicated as possible.
Forget the help to buy rubbish, 20%-40%. Reintroduce interest only, and multiple income to get people on the ladder.
Ian Ringrose
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Sign Up17:48 PM, 4th February 2016, About 9 years ago
Leads 5 year fixed rate for “help to buy” is 2.45 per cent, Nationwide is 2.74%, assume that in the first 10 years ALL the savings compared to renting is used to pay down the mortgage, then it looks like “help to buy” is a good deal for SOME people.
It ALL comes down to how long a person will remain in the same home for!
Michael Barnes
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Sign Up21:06 PM, 4th February 2016, About 9 years ago
Calculations assume an interest-only mortgage; is that reasonable?
With repayment mortgage, interest is approximately £100K less.
Also, what about the rest of life?
That is likely to be another 25 years; mortgage paid off, but ever-increasing rent.
Alex
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Sign Up9:23 AM, 6th February 2016, About 9 years ago
Loads of great comments here, thanks everyone.
Just for the sake of clarity, I'm NOT advocating that people shouldn't buy their own home, I just wanted to try to understand the cost of H2B to see whether it truly was a 'saviour', or whether the costs of buying using H2B was still outside the reach of many folk.
I think I have shown that the cost of buying a new home using H2B is still not really 'affordable' to a huge swathe of the population and will not therefore magically convert our whole country into a 'home owning democracy' as the Government likes to think.
What do you think?
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Sign Up20:55 PM, 9th April 2016, About 9 years ago
Help to Buy is a SCAM!
It's a trap for those poor youngsters desperate to get on the property ladder. They will sign up now and suffer later.
The 'interest free' equity loan is too good to be true. It is only interest free for 5 years and then charged at a high rate of interest.
It is a lose - lose situation for the debtor. If house prices rise, the debt will also rise, making a very expensive loan. If house prices fall then youre stuffed anyway.
It is a TRAP because the loan must be repaid or you cannot move house! If house prices rise the debtor will be even more trapped! If prices fall they will be trapped by neg equity. And after 5 years must pay big interest.
Mark my words gov will sell the debt to a ruthless profiteering debt collector once the interest payment starts. (Probably for pennies in the pound at a loss to the tax payer). The DCA who buys will love the secured debt that noone can escape!
Stephen Ormerod
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Sign Up7:59 AM, 19th January 2017, About 8 years ago
Hi
I'm afraid you have missed a few important points.
First of all, renting over buying may suit some people UNTIL they reach retirement and find their pension income is somewhat different to what they have been earning and simply cannot afford to pay high rent levels. So they have to move into cheaper accomodation & still keep paying rent for the rest of their life. No such problems for the person who has bought his own house, as the mortgage is re-paid and they lose a major cost out of their budget.
Secondly, you fail to mention that if house prices fall, then you may pay back LESS than the Help to Buy borrowed - as they share in any capital loss on the house value too. So Help to Buy gives you some downside protection that you do not get with a mortgage - where a house price fall can leave you in negative equity. Obviously Help to Buy shares in the upside too (which doesnt happen with a mortgage) - however my point is worth knowing.
Thirdly - Help to Buy finance starts at 1.75% and is reviewed annually and increased by a factor linked to inflation. This may become very cheap finance in the long run, if mortgages rates rise much faster - so people might be better off having 20% of the purchase price on Help to Buy.
Fourthly, it is helping people get the house they want, that they might not be able to afford otherwise. You get some households who are income rich/cash poor - so they can afford the mortgage, but don't have the deposit - without Help to Buy, lenders require that you have a minimum 10% deposit on new builds and in some cases 20%. So Help to Buy helps buyers them around this predicament.
Finally, the figures you are using some very high interest rates and assumptions.
I am a financial adviser and have done many new build mortgages using Help to Buy.