Government NewBuy scheme: a leg up the ladder for property buyers?

Written by: Lyndon Campbell - Partner, Commercial Property
Dated: 14/03/2012

A new mortgage indemnity scheme will help people in England entering or climbing the housing property market, according to the government.

Under the NewBuy initiative, taxpayers and building firms will co-guarantee new homes for existing or first-time buyers. The scheme is available in England only on flats and houses up to a maximum value of £500,000.

NewBuy Scheme – Get on the Property LadderThe department of communities and local government says NewBuy will facilitate lending by a bank or building society of up to 95% of a new property's sale price. The builder will pay 3.5% of the sale price into a special account held by the lender for 7 years, while taxpayers will provide a further 5.5% guarantee.

However, the taxpayers' money will be called in only if the property market significantly crashes.

The prime minister has also confirmed the extension to up to £75,000 of the right-to-buy discount for social housing tenants, under which people who have lived in a council house for 5 years could get a 35% discount, with an extra 1% for each extra year to a £75,000 maximum.

After 5 years, apartment tenants will get 50% off, with 2% added per annum. The government says the cash raised from the sales will be put towards new "affordable homes for rent".

Of both initiatives, David Cameron noted that good homes form the basis of strong families and stable communities.

"That's why I want us to build more homes and I want more people to have the chance to own their own home," the prime minister said. "We're rebooting the right-to-buy scheme to increase discounts for 2 million tenants in social housing in England. And we're delivering on our promise to offer affordable mortgages to buyers who might otherwise not be able to raise the money to buy a newly-built home."

The Home Builders' Federation (HBF) and the Council of Mortgage Lenders are supporting NewBuy, along with 7 construction firms: Barratt, Bellway, Bovis, Linden, Persimmon, Redrow and Taylor Wimpey. Constructors hope the plan will lead to the building of an extra 100,000 properties, which in turn would create half-a-million jobs.

HBF's executive chairman, Stewart Baseley, said: "NewBuy will help thousands of people to meet their aspirations to buy a new home, freeing up the housing market and helping first-time buyers and those unable to take the next step on the ladder.

"The scheme will also provide a vital kick-start for house builders large and small who will be able to build the homes and create the jobs that the country desperately needs."

For the opposition, the shadow housing minister Jack Dromey asked: "Why has the number of major lenders participating in the scheme fallen from 7 to 3 and the number of builders from 25 to 7 compared with when this scheme was originally announced?"

"Reports have also suggested that few, if any, mortgage products will be available straight away and that the interest rates might not be attractive to would-be buyers."

"It would be absolutely wrong for the government to raise the expectations of families and young couples only for them to find little choice and that they're unaffordable."

Other criticisms of NewBuy are that it does nothing more than to assist construction companies and that the government's meddling in the housing market is simply delaying an inevitable fall in property values.

Shelter, the charity for the homeless, said the strategy does little for the growing number of families living in insecure private rented housing "with hardly any protection from rogue landlords or unexpected rises in rent."

A Council of Mortgage Lenders spokesman observed that the scheme has lenders' support. "This is part of a wider approach to stimulating demand in the economy and it is part of a growth package and a series of measures."

One of Britain's biggest housebuilders, Barratt Homes, said 20,000 people had already registered for more information about NewBuy.

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