Author Topic: Government's NewBuy scheme - buyers beware  (Read 3152 times)

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Philofacts

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Government's NewBuy scheme - buyers beware
« on: March 13, 2012, 08:50:20 am »
The Government launched the NewBuy scheme this week. 
Basically it is a scheme designed to make it easier for buyers to get 95% mortgages on newly-built homes priced under £500,000.
By underwriting mortgages on new homes priced under £500,000 it protects lenders from losses if borrowers cannot keep up payments and homes are then repossessed and sold at a loss.
The government is underwriting 5.5% of the purchase price with house builders taking on a further 3.5%. 
At the time of writing, Barratt, Bovis, Bellway, Crest, Linden, Persimmon, Redrow and Taylor Wimpey have signed up to participate in the scheme.

A purchaser of a new build home would then theoretically, only need a 5% deposit to buy a new home, giving access home loan deals available that require larger deposits.

This will only happen if the lenders like the idea of handing out 86% loan to value (LTV) mortgages on a new home.
That also assumes that the lenders are unaware that new-build prices have a larger downside risk.
Few lenders have any new mortgage products ready for the NewBuy scheme.
Only Nationwide (5.69% 3-year fix £999 fee), Barclays (4.99% 2-year fix £499 fee) and NatWest (4.29% 2-year fix £499 fee) have released NewBuy mortgages.
Santander and Halifax say they will have deals soon.

Whilst NewBuy reduces the risk for lenders, it does not cut risks for borrowers.
If your home is repossessed and sold at a loss you will still be liable for any shortfall between the sale price and the outstanding mortgage.

New homes are priced at a premium, and newly-built property can be difficult to value accurately.
With incentives like cash-backs and various extras including furnishings and carpets, house builders can inflate and hide the real values of the homes they build.

With deposits of just 5%, there is a much greater risk and likelihood of negative equity.
Anyone using this scheme to buy a new home should also be aware they could become mortgage prisoners, unable to move because they cannot get a new loan.

Mortgage prisoners, as defined by The Financial Service Authority, are "people who are unable to move or re mortgage because they have a LTV of 85% or more".
Anyone taking up a NewBuy deal would automatically become a "mortgage prisoner" by definition on day one!

Critics of the NewBuy scheme say it is a "tax-payer funded bung for big house builders." 
Something it is hard to argue against!
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The Prophet

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Re: Government's NewBuy scheme - buyers beware
« Reply #1 on: March 23, 2012, 11:50:27 am »
Why is the taxpayer being asked to support more risky borrowing?
This is exactly what caused the financial crisis. 
First-time buyers could be encouraged by house builders to take on more debt than they can afford ending up in negative equity, possibly even defaulting on the loan.
This would then have to be covered to some extent by the taxpayer.

It is also conceivable that this scheme could even result in house prices going up.

This scheme is more about subsidising private house builders.
If it was genuinely intended to help people buy a home it would have been made available for all homes not just new ones.
This is intended to help a house building industry with few customers and get people working not helping home buyers get a 95% mortgage.

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Albert

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Re: Government's NewBuy scheme - buyers beware
« Reply #2 on: March 26, 2012, 10:39:57 am »
So the government is going to guarantee 5% of a new home buyer's mortgage.

Well you know what they say:
a Guarantor is a fool with a pen.