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Ray Boulger: Looking under the bonnet at Help to Buy

Ray Boulger

The theme of both Help to Buy schemes is making it easier and cheaper to buy a home with a 5 per cent deposit, thus also providing some stimulus to the housing market.

Only the shared equity scheme directly helps developers but all housing market transactions generate significant other economic activity, and hence extra VAT and more jobs. Thus, even if the Government only covers its costs there will be a benefit to the economy.

However, although the shared equity scheme is interest free for the first 5 years, as the Government can currently borrow so cheaply, with 5 year gilts yielding only 0.62 per cent at the time of writing, it only needs a very small increase in house prices for the taxpayer to profit from the scheme, even before considering knock on economic benefits.

As developers no longer provide part of the equity loan there is now no reason for them to restrict its availability. In fact, as the existing 95 per cent LTV NewBuy scheme requires the developer to pay an insurance premium of 3.5 per cent, plus an admin charge taking the cost up to about 4.2 per cent, it would be entirely logical for developers to switch from pushing NewBuy to pushing Help to Buy.

From an adviser perspective Help to Buy now needs to be considered alongside other options for all clients buying a new build property up to £600,000 with a small deposit. If the alternative NewBuy scheme is available on the chosen property and the buyer prefers that option to Help to Buy the mortgage adviser will need to resist pressure from the developer to push Help to Buy for that particular client or risk a subsequent mis-selling claim.

The basics of comparing a standard 95 per cent LTV repayment mortgage with a 75 per cent LTV repayment mortgage plus a 20 per cent second charge equity mortgage can be summed up as trading off a monthly cash flow benefit against the need to pay away 20 per cent of any capital gain when the property is sold (or remortgaged to take out the equity loan).

However, there are several other considerations including the fact that some buyers will welcome sharing the risk of the value of their property falling and different interest rates are likely to apply to these different deals.

At first sight it appears odd that when from year six interest (which the Government calls a fee) is charged on the equity loan subsequent annual rate increases are linked to RPI rather than CPI, as only last month the UK Statistics Authority announced that RPI will no longer be designated as a national statistic.

Surely the decision linking rate increases to RPI rather than CPI was not influenced by RPI normally increasing quicker than CPI?

Likewise, presumably the Government would not have decided to call what is really interest, payable monthly as normal, a fee just to avoid the regulatory requirement to quote an APR.

Admittedly, working out the APR would be challenging but that merely demonstrates the nonsense of most mortgage APR calculations!

Ray Boulger is senior technical manager at John Charcol

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