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The Government's Mortgage Kick-Start

The Government has announced one scheme that will provide a loan for some first-time buyers and a wider scheme open to everyone which will guarantee a portion of the mortgage so that the banks can offer loans closer to 100%. On the face of it, this sounds like a good idea. It is very difficult for younger people to get on the housing ladder, or further move up, and the proposals should make things easier for them. Interest rates are at an all-time low but that is not much use if you can’t get a loan. The lenders are generally demanding huge deposits – at least 20% of the purchase price of the property, and more like 40% if you want to get a decent rate of interest, a struggle on most incomes. There is a good reason why lenders are reluctant to offer mortgages to many people in their twenties. The job market is too insecure, and their earnings prospects too poor to make many of them a reasonable risk. There are also good reasons for demanding a 20% deposit. Lenders need a decent amount of equity in a property to make sure they are protected against future falls in prices or inability to meet mortgage repayments. There are other options for the government to make property more affordable. Relaxing planning restrictions to allow more homes to be built is a good idea – more supply will mean lower prices. It could open up more competition in the mortgage market or offer tax breaks to house builders and buyers alike. Ultimately if people can’t really afford a home then is it better not to subsidise them to buy one' It distorts the market and if it goes wrong then we will all end up paying. An extreme view may be that by offering loans to buy property to people who would otherwise not be able to afford them is laying the foundations for our own future sub-prime crisis. The effect here in the West End will be minimal as precious few properties are bought by first time buyers or come in under the £600,000 limit. Sellers will be reluctant to accept offers from buyers heavily reliant on a loan when there are many cash buyers wandering the streets. Out in the suburbs and wider afield it will have a small effect but will do nothing to alleviate the real problem. That is that we need more new homes to be built, not subsidies to buy the few that currently exist.

The Government has announced one scheme that will provide a loan for some first-time buyers and a wider scheme open to everyone which will guarantee a portion of the mortgage so that the banks can offer loans closer to 100%. On the face of it, this sounds like a good idea. It is very difficult for younger people to get on the housing ladder, or further move up, and the proposals should make things easier for them. Interest rates are at an all-time low but that is not much use if you can’t get a loan.

The lenders are generally demanding huge deposits – at least 20% of the purchase price of the property, and more like 40% if you want to get a decent rate of interest, a struggle on most incomes. There is a good reason why lenders are reluctant to offer mortgages to many people in their twenties. The job market is too insecure, and their earnings prospects too poor to make many of them a reasonable risk. There are also good reasons for demanding a 20% deposit. Lenders need a decent amount of equity in a property to make sure they are protected against future falls in prices or inability to meet mortgage repayments.

There are other options for the government to make property more affordable. Relaxing planning restrictions to allow more homes to be built is a good idea – more supply will mean lower prices. It could open up more competition in the mortgage market or offer tax breaks to house builders and buyers alike. Ultimately if people can’t really afford a home then is it better not to subsidise them to buy one' It distorts the market and if it goes wrong then we will all end up paying.

An extreme view may be that by offering loans to buy property to people who would otherwise not be able to afford them is laying the foundations for our own future sub-prime crisis. The effect here in the West End will be minimal as precious few properties are bought by first time buyers or come in under the £600,000 limit. Sellers will be reluctant to accept offers from buyers heavily reliant on a loan when there are many cash buyers wandering the streets. Out in the suburbs and wider afield it will have a small effect but will do nothing to alleviate the real problem.

That is that we need more new homes to be built, not subsidies to buy the few that currently exist.

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