We've had shared ownership, interest-only mortgages and inter-generational mortgages. Now this week the Government is dipping its toes a little deeper into the pool of innovative ideas on how to get first-time buyers off the rental breadline and on to the property ladder. The Open Market Homebuy Scheme will allow public sector "key workers" for example, nurses and teachers to take out a mortgage for 75% of a property's value from one of its participating lenders. The remaining 25% of the value is split equally between the lender and the Government as a top-up loan. Does this sound good to you?
Key Worker Mortgages: restrictions and costs
Unfortunately, it's not. Because of the restrictions and costs associated with the scheme, experts are warning that it should be relied on only as a last resort. The first problem is that the 75% mortgage is being offered at pretty uncompetitive rates. For example, Advantage offers a rate of 5.59% in the first year and 6.59% in the second, after which it tracks Libor plus 2.5% for three years. Libor is currently 4.75%, so borrowers would be saddled with a rate of 7.25%. Not cheap. The second problem is that you are expected to hold on to the property for at least five years, after which you can sell it on. However, the 25% top-up loan has to be repaid in full, as well as any increase in the property's value.
According to Nick Gardner of Chase de Vere Mortgage Management in
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The Times, "the restrictions mean this is far from a cure to the problems" faced by buyers. In fact, the Government could be adding to them, because essentially all they are doing is enabling first-time buyers to buy property at vastly inflated prices, and thus suffer the consequences of falling prices.
Why Open Market Homebuy could be adding to the housing bubble
There's a bigger question here: why would anyone want to buy into a market recently described by the IMF as overvalued by "any conventional measure"? First-time buyers are already taking out home loans that are 3.24 times the average income, says the Council of Mortgage Lenders the highest multiple since records began in 1974. And if that isn't representative of how far out of reach prices have run, then the growing number of innovative products like this on the market is, says Keith Tondeur of debt-advice charity Credit Action in the Daily Mail. They're "building a housing bubble", he says, and if it bursts, "millions of borrowers will be in trouble".
It's all representative of just how detached prices have become from reality. "Higher-income multiples, coupled with higher-interest payments as a proportion of income, suggests that they [first-time buyers] are continuing to stretch themselves" to get their first toe on the ladder, says Michael Coogan, Director General of the Council of Mortgage Lenders on Reuters.
And as Marc Coleman, economics editor in the Irish Times, has recently commented, when people overstretch themselves, they lose all sight of reality. "Fundamentals are rational. Confidence isn't." It's only when Sylvester the cartoon cat chasing Tweety Pie "realises that the ground beneath his feet has vanished that the fall happens. So it is with overvalued asset prices".
