Property developers and house builders confirm ‘Help to Buy’ is working
During the past couple of weeks a number of developers and builders have confirmed that the Government’s Help to Buy scheme has clearly helped property sales and increased the demand for further development, during the past quarter.
The Help to Buy Scheme makes interest free loans available to people looking to buy a home. These loans can provide a deposit of up to 20% of the purchase price when buying a property. Buyers just need to provide a 5% deposit enabling them to purchase a home with a 75% mortgage facility provided by one of the mortgage companies signed up to the Help to Buy Scheme.
House builders were amongst the first hit in 2008 by the credit crunch. Overnight 100% mortgages disappeared and buyers now needed to find substantial deposits of 25%. This meant that a significant percentage of people preparing to buy their first home were suddenly unable to do so.
This was very dramatic and left most first time buyers unable to obtain a mortgage because they simply didn’t have the 25% deposit required. This led property developers stopping their developments in their tracks, realising that even by dropping the price of completed new properties this would still not help to sell them! If a developer planned to sell a new house for £100,000 a buyer would typically obtain a 95% or 100% per cent mortgage. Suddenly a first time buyer can only obtain a 75% mortgage meaning they would need to find a £25,000 deposit, something that most first time buyers simply didn’t have. A major problem for developers who were desperate to sell their current stock and repay their bridging loans and development finance facilities, was that even by reducing the price of the properties, for example from £100,000 to £70,000, the buyer would still need to obtain a 25 per cent deposit. This would now have reduced from £25,000 to £17,500, but still a problem for most first time buyers who wouldn’t be able to find this sort of sum as a deposit.
The record low Bank of England Base rate has not been passed on by the lenders because they have had limited funds, much of which has come from more expensive funding sources. However the main reason for reduced lending and people being unable to obtain finance is the tighter lending criteria that borrowers have had to meet since the credit crunch. The increase in loan to values seen recently is helping to increase borrowing and movement in the property market. This has also clearly been helped by the Help to Buy Scheme, which has made 95% borrowing for buying a home possible once again.