Is NewBuy actually any good for buyers?

Wantaflat

This must be yet another NewBuy scheme question so I apologise in advance if it's already been discussed.

The government announced the NewBuy scheme just as we were seriously looking at properties and I've been wondering whether the scheme is worth it for someone like myself.

I started doing some maths on the possible savings of the scheme to a buyer, and was surprised by how "low" the saving is so I wanted to run this by those of you who know this stuff better.

Assuming a £250K purchase and a 20% underwriting from the govt towards a new build, interest free for 5 years, on an interest rate of 3.99% (I'm being generous here as I understand the IR is often higher on the scheme), would the saving to the borrow/purchaser be 250,000*0.2*3.99% = 1995?

Is that it? Is £1995 the saving made if you pay the govt guaranteed loan off within the 5-year interest free period on a £250K property at 3.99% IR?

Apart from the fact that the initial deposit is much lower and that the repayments are kept low-ish, I'm surely missing something about the benefit of this scheme...? If so does anyone wish to shed some light on it to correct my calculations?

brit1234

No it is not a good idea.

You end up in instant negative equity as soon as you buy. Interest rates irrespective of base rates will be a lot higher, even though you are unlikely to be able to remortgage. Then in 5 years time you start to have to pay the equity loan ie the time bomb.


Have a look at this bbc video from 2008 with the law society warning against them.

http://news.bbc.co.uk/1/hi/business/7613781.stm

Its just designed to help builders profits and inflate prices. Its a con and will leave people in huge debt.

Ciderarmy1987

brit1234 wrote: »

You end up in instant negative equity as soon as you buy. why? Interest rates irrespective of base rates will be a lot higher, even though you are unlikely to be able to remortgage again why?. Then in 5 years time you start to have to pay the equity loan ie the time bomb. not if you budget for this to happen

not sure I agree with what you have said, would you be able to explain more?

wymondham

No, it's a bad idea as is generally accepted by those that analysed it after the budget.... As above really its there to sell overpriced properties. Without it prices would find their own natural (lower) level..

brit1234

Ciderarmy1987 wrote: »

not sure I agree with what you have said, would you be able to explain more?

Because you are buying a new build with a 5% deposit. Newbuilds have new premium price added in, in other words new builds cost more as new and as soon as bought not new. This is usually 10% fall, on top of that builders add extra price on them as people can borrow more (sub prime lending).

The proof of this is lenders requiring extra big deposits on newbuilds as so overvalued. So lets say 15% more expensive, 5% deposit, instant 10% negative equity.

Remortgaging problems is based on what has happened on shared ownership/equity mortgages in the past. As they are higher risk and lenders like the best borrowers on their books there is no guarantee that your higher risk mortgage will be available. Especially after 5 years when the loan needs to be repaid. Also you are unlikely to get the equity when you bring in my first point so stuck on the SVRs which continue to rise.

2013 is the year that the shared equity time bomb is starting to go off for the 2008 buyers. We have already people in hardship on these forums with it. This is based on the research on what happened to the ALT A and Option Arm mortgages in the US in previous years.

Far better you save a bigger deposit and don't exposure yourself to reckless debt.

If you don't believe me find one news article with experts recommending this scheme other than government or builders.

Wantaflat

brit1234 wrote: »

The proof of this is lenders requiring extra big deposits on newbuilds as so overvalued. So lets say 15% more expensive, 5% deposit, instant 10% negative equity.

I do remember, when I first started looking, that several banks e.g. HSBC would lend on new builds but required 20% deposits. This was well before the govt scheme was announced. Knowing that several banks would lend at 10% on other types of properties if credit history and other conditions satisfactory, I don't understand why people have to rush to buy something that requires, by nature, a higher deposit as is the case for new builds...Anyway, thanks for your thoughts. I thought there was some gem built into this scheme that I was missing

Ciderarmy1987

What about a relatively unique scheme like this one?

http://www.barratthomes.co.uk/new-homes/south-gloucestershire/H439401-Hanham-Hall/?WT.mc_id=

somethingcorporate

Ciderarmy1987 wrote: »

What about a relatively unique scheme like this one?

http://www.barratthomes.co.uk/new-homes/south-gloucestershire/H439401-Hanham-Hall/?WT.mc_id=

With such an ugly set of homes you'd be limiting your resale market significantly.

eviekins

Unusual looking, yes.
Although, they are 'Eco' homes. Some people might buy in to that, which could make them more desirable.

kingstreet

Wantaflat wrote: »

This must be yet another NewBuy scheme question so I apologise in advance if it's already been discussed.

The government announced the NewBuy scheme just as we were seriously looking at properties and I've been wondering whether the scheme is worth it for someone like myself.

I started doing some maths on the possible savings of the scheme to a buyer, and was surprised by how "low" the saving is so I wanted to run this by those of you who know this stuff better.

Assuming a £250K purchase and a 20% underwriting from the govt towards a new build, interest free for 5 years, on an interest rate of 3.99% (I'm being generous here as I understand the IR is often higher on the scheme), would the saving to the borrow/purchaser be 250,000*0.2*3.99% = 1995?

Is that it? Is £1995 the saving made if you pay the govt guaranteed loan off within the 5-year interest free period on a £250K property at 3.99% IR?

Apart from the fact that the initial deposit is much lower and that the repayments are kept low-ish, I'm surely missing something about the benefit of this scheme...? If so does anyone wish to shed some light on it to correct my calculations?

Forgive my pedantry, but you are talking about "Help To Buy - Equity Loan", not "NewBuy."

HTB - EL provides a loan of upto 20%, on top of the purchaser's minimum 5% deposit. As a consequence, the mortgage rate is lower, as it is based on the 75% loan to value.

For example, a 75% mortgage on HTB is 3.19% for two years, while a 95% Newbuy product is 4.34%.

The loan is interest-free for five years, from year six onwards it is charged at 1.75%, increasing each year. With inflation at 6%, it would be 1.87% in year seven, 2.0% in year eight and so on. You need to factor-in the "opportunity cost" of the interest on savings if you had the capital to repay the loan, but did not do so, because the savings rate was higher.

Finally, the imponderable. You have to repay the loan based on the value of the property at the time of repayment. 20% loan at the outset means you repay 20% of the value of the property in the future. Who knows what that might be?

Wantaflat

kingstreet wrote: »

you are talking about "Help To Buy - Equity Loan", not "NewBuy."

OK, how does the equity situation work on NewBuy then?