Is London HTB 40% loan, mis-selling?

mrginge

gagahouse wrote: »

Agree with you but are you sure about the bolded part? I always wondered if the govt wears the downside risk.

https://www.helptobuy.gov.uk/wp-content/uploads/Help-to-Buy-Buyers-Guide-Feb-160216.pdf

Page 15

elliotwave

CLAPTON wrote: »

DO THE MATHS PROPERLY

house A with goverment loan
property value 200,000
gov loan = 80,000
your deposit = 5% = 10,000
mortgage = 110,000
if you sell for 250,000 (i.e. 12.5% more)
then your equity will be 250,000 - 110,000 - 100,000 = 40,000
so your miserable 10k deposit has grown to 40,000 as deposit for next house

house B with no gov loan
deposit =10,000
mortgage = 110,000
property value = 120,000
if you sell with 12.5% growth then house value = 135,000
new equity is only 15k for next house

so you a lot more deposit available for your next house and have enjoyed a better house too

errors and exception excluded

I only put that example up to illustrate that the amount of the equity loan you pay back can increase from the original loan amount. I am not arguing that the benefits of the scheme aren't there if you are selling in a rising market. My point I think still stands that people with lower incomes are being lured into increased levels of lifelong property debt particularly when 40% equity loans are being doled out on behalf of the taxpayer. So in the example above, forget selling at a profit ... say I have bought the property and have no intention of selling. I am staying put. At the end of the 25 years I will have had to have paid off the capital + interest mortgage, 25 years of the equity loan interest (effectively an additional interest only mortgage) + a 40% lump sum payment of the valuation of the house at the END of the 25 year period.

The point being that were it not for the 40% equity loan, people couldn't do it, and so, these sky high property values would no longer be effectively supported by taxpayer money and would need to come down. (The illustration above does not apply to the typical London property that now needs the 40% tax payer loan to support its over valuation)

HornetSaver

gagahouse wrote: »

Agree with you but are you sure about the bolded part? I always wondered if the govt wears the downside risk.

Governments, companies and the like do have a habit of taking medium-to-long-term assumptions and assuming that they are permanent. For instance when Gordon Brown cut VAT to 15% from the long term 17.5%, quite a few businesses saw it as a headache because the rate was so long term and thus so embedded into their systems, that it wasn't as simple as changing the figure and resetting the system.

It wouldn't surprise me at all if the Government have made similar assumptions on real-terms house prices continuing to rise based on how the last 25 years have gone.

gagahouse

mrginge wrote: »

https://www.helptobuy.gov.uk/wp-content/uploads/Help-to-Buy-Buyers-Guide-Feb-160216.pdf

Page 15

Will I have to repay the full amount of Help to Buy assistance or just a percentage of the total sale proceeds?
When you sell your home, (unless you have repaid the Help to Buy equity loan document previously) the Help to Buy equity loan document commits you to repay a percentage of the market value equal to the percentage contribution of assistance received.
This means if the market value of your property falls below the level at which it was first purchased, you will repay less than the original amount the Agency contributed to the original purchase.
You must always show that the proposed sale value is at the prevailing market value before going ahead. The Agency’s Mortgage Administrator must approve the sale before allowing the second charge to be released.
As long as you have complied with all your obligations in the Help to Buy mortgage deed, you will not be required to provide for any shortfall in the equity loan repayment if you sell when values have fallen. If you do not comply with the terms of the Help to Buy mortgage deed, the Agency will seek to recover all the money they are owed. Your solicitor will explain the Help to Buy mortgage deed to you before the property is purchased.

Thanks mrginge, so the govt does have some of the downside risk , I'm surprised, or just very cynical !

In a way it's like a free call option for the first 5 year interest free period, not bad at all for the buyer.

glosoli

Not a fan of shared equity schemes at all.

CLAPTON

elliotwave wrote: »

I only put that example up to illustrate that the amount of the equity loan you pay back can increase from the original loan amount. I am not arguing that the benefits of the scheme aren't there if you are selling in a rising market. My point I think still stands that people with lower incomes are being lured into increased levels of lifelong property debt particularly when 40% equity loans are being doled out on behalf of the taxpayer. So in the example above, forget selling at a profit ... say I have bought the property and have no intention of selling. I am staying put. At the end of the 25 years I will have had to have paid off the capital + interest mortgage, 25 years of the equity loan interest (effectively an additional interest only mortgage) + a 40% lump sum payment of the valuation of the house at the END of the 25 year period.

The point being that were it not for the 40% equity loan, people couldn't do it, and so, these sky high property values would no longer be effectively supported by taxpayer money and would need to come down. (The illustration above does not apply to the typical London property that now needs the 40% tax payer loan to support its over valuation)

DO THE MATHS

a. renting and you have NOTHING after 25years

and
b. compare (asI have already done what you position wouldm be if you sold after 25 years : which option would be be bette off

and find any 25 year period where you wouldn't be MASSIVELY better off

but your choice to be poor.

elliotwave

CLAPTON wrote: »

DO THE MATHS
a. renting and you have NOTHING after 25years
.

Yep, that's a fair point, but depends on your long term approach.
It is possible to save and invest whilst renting when property is high, wait for the market to at least swing back in favor of the buyer and then place a much larger deposit down when prices have sanitized. The long term result being a reduced capital + interest debt burden. The bulls have had it easy since the global 08 heart attack as the patient has been of life support (QE+HTB etc etc) ever since, that won't necessarily continue. Also if interest rates rates have to rise to control inflation the market will swing back again. Markets, without fail, swing back and forth.

CLAPTON

elliotwave wrote: »

Yep, that's a fair point, but depends on your long term approach.
It is possible to save and invest whilst renting when property is high, wait for the market to at least swing back in favor of the buyer and then place a much larger deposit down when prices have sanitized. The long term result being a reduced capital + interest debt burden. The bulls have had it easy since the global 08 heart attack as the patient has been of life support (QE+HTB etc etc) ever since, that won't necessarily continue. Also if interest rates rates have to rise to control inflation the market will swing back again. Markets, without fail, swing back and forth.

depending where you are living
-rents are generally higher than mortgage payments on a like for like basis
-rents general go up over a period of time and not down
-so it is possible to build up a larger pool of savings whilst buying than if you are renting

but if you think that house prices will collapse in a year or so then by all means continue renting.

but get a spread sheet together and do the maths and check out rental prices and equivalent purchase prices.

westernpromise

Rents tend to go up when house prices go down, and to stabilise, or fall, or go up less when house prices rise. The reasons are fairly obvious. It means it is harder, not easier, to save while renting in a house price downturn. If you are as risk averse as your average crashist you will tend not to believe prices have stopped falling until they have recovered and gone back up another 50 to 100%.

The-Joker

The first HTB number 1 was 20% interest free for five years, those that did it will be coming up on five years soon. They must all be praying that interest rates stay down here just a little bit longer, or a few more years .....