Mortgage support measures may do more harm than good

11 Downing StThere are two components to the new 'help-to-buy' scheme.
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1. Newly built homes
If you want to buy a newly built home and you don't have much money for a mortgage deposit, the Government may help you.

As long as you have enough money for a 5% deposit, the Government will give you an interest-free loan for 20% of the home's value. Then you'll only have to borrow a 75% loan from the bank or building society. That may mean you can get a lower rate on your mortgage.

The Government's loan will be interest-free for five years. This offer is only available for homes that are selling for £600,000 or less.

2. New mortgage guarantee
The Government's mortgage guarantee should help a wider range of home buyers, not just for newly built homes.

The guarantee will be for loans where there is only a small deposit – also known as high LTV (loan-to-value) loans.

High LTV loans are riskier for lenders. That's because there's a greater risk they won't get their money back in the end.

So interest rates are normally higher for these loans and some home buyers have struggled to get any loan whatsoever.

The Government is now saying that it will pay up if a lender can't get all its money back from a high LTV loan – this would normally be because a sale of a home doesn't raise enough cash to pay off the loan.

This guarantee will reduce the risk for lenders, so it should mean that more potential buyers will be able to get mortgages and interest rates for High LIV loans should be lower too.

What could be possibly wrong?
So why am I not keen on this scheme? After all, more people should be able to get their foot on the housing ladder.

My concern is that the scheme's 'unintended consequences' may be more serious than many folk now realise. This has certainly been the case with the Funding for Lending scheme which has pushed down interest rates on savings accounts.

I fear that 'help-to-buy' may give an unwelcome boost to house prices. More mortgages means more buyers and more demand, pushing up prices. And that's not good news for first-time buyers.

The best way to help first-time buyers is to increase the supply of new homes which will drive down prices. I grew up in the green belt and a big part of me is reluctant to build homes on farmland, but I think it's the only way to restore sanity to our property market.

Building more homes on brownfield sites in towns and cities will help too.

For too many years, Governments supported the mortgage market through mortgage interest tax relief. Effectively that meant the Government would pay some of your mortgage interest bill. This tax relief helped to push up house prices and distorted our economy.

Economists railed against this relief year-after-year but our politicians didn't have the guts to abolish it until the late 90s.

But now we're returning to Government support for the mortgage market. I predict future chancellors will find it just as hard to remove these new support measures.

And anyway, the mortgage market is already very healthy for a large number of borrowers – they're benefitting from super-low interest rates.

Granted, it's a different story for folk with small deposits. They can struggle to get loans and often have to pay relatively high interest rates. Yes, Osborne's new scheme will help some of these people buy a home more quickly than would otherwise be the case, but it will also boost house prices. And I don't think that's in the interest of first-time buyers now or in the future.

We need more new house building and less Government support for the mortgage industry.

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Mortgage support measures may do more harm than good

The Chancellor has cut the price of beer. He said a planned 3p rise in beer duty tax was being scrapped and replaced by a 1p cut on a pint of beer.

While lower interest rates are intended to boost borrowing for business and keep costs down for mortgage customers, the Chancellor brings another Budget devoid of encouragement for savers. Faced with near 0% interest rates and 3% inflation, there is no help for those who need to save for the future, or those that already live on their savings in retirement.

"Low interest rates are making life ever harder for people reliant on their savings. Their spending power is being reduced and their standard of living eroded on a daily basis," said Simon Rose of Save Our Savers. "The attack on savers is short-sighted and undermines the country's prospects for investment, growth and retirement."

A major headline-grabbing measure to help struggling first-time buyers is the new Help-to-Buy scheme. Made up of two parts, the first commits £1.3bn to shared equity loans that enable first-time buyers to borrow up to 20% of the value of a new build home towards a deposit, providing they can contribute 5% themselves. The loans will be interest free for five years and be repayable on house sale. The scheme will cover all new properties up to £600,000 in value – around 90% of all new homes in the UK.

The second is a Mortgage Guarantee for lenders, intended to help all families who are struggling with deposits. The scheme will make £130bn worth of mortgages available from 2014 and enable lenders to offer loans at higher-to-loan value, which will Mr Osborne said will "dramatically increase" the availability of mortgages. The guarantee will run for three years and apply to bold old and new property. Stephen Noakes, Mortgage Director at Lloyds Banking Group, commented: "We are very supportive of innovation in the housing market and believe that the mortgage guarantee scheme, will give a much needed boost to the housing market and most importantly address the issue of accessibility. "Crucially, this scheme will not only help first time buyers but also second steppers, a key segment of the housing market that is also in need of more support and attention. Whilst the property market is likely to continue to be challenging, the fresh support announced today will have a real knock on effect across the whole of the housing market and we expect it could help around 50,000 people a year."

Payment of taxes is the "glue that holds the economy together" the Chancellor said as he reaffirmed his commitment to crackdown on evasion and the professional services that advise on it. "With more measures to rein in Corporate Tax avoiders, the Chancellor has sent a clear message that aggressive avoidance is no longer acceptable," said Martin Hook, Managing Director of research and development tax specialists, Alma Consulting Group. "This will have a significant impact on the Big 4 and other firms who market tax avoidance schemes and will need to consider the morality of the schemes that they sell and the spirit of the tax legislation."

As was widely predicted, Osborne froze the fuel duty hike due in September 2013. He announced that his repeated scrapping of this duty has saved the average Ford Focus owner £7 on every tank of petrol.

Stating his commitment to helping entrepreneurs get ahead and recognising that the cost of employing people is a huge burden to small firms, the Chancellor announced a surprise move with National Insurance relief of £2,000. Called the Employment Allowance, he said the new measure means than 450,000 small businesses – which account for one third of all companies in the UK - can employ one person earning £22,000 or four people earning the minimum wage, without paying National Insurance.

"The Employment Allowance will certainly be a massive boon for small businesses. Not least because most weren't really expecting it," said Jonathan Elliott, managing director of MakeItCheaper.com. "Put it another way, a £2,000 saving for a typical small business is the equivalent of cutting their annual energy bill in half or putting 1,250 litres of free fuel in its fleet of vehicles." Yet the Government fell short on support for new enterprises, explains John Williams from Kuber: "Noticeably absent from the Chancellor's speech was any news of extending or enhancing the Enterprise Investment Scheme (EIS). Many were hoping to see the Government offer more help to start-up companies looking for second round finances, but nothing materialised."

There was bad news for public sector workers, who will see pay increases limited to 1% in 2015/2016. The government will also revisit 'progressive pay' which sees pay increase automatically each year which he said was 'difficult to justify' given that private sector pay has been frozen or cut. The armed forces, however, will be exempt from this.

Feeling the pressure on help working families, the Chancellor made a welcome announcement that working parents will receive a contribution from the Government towards the cost of childcare. Working parents will receive 20% - equivalent to the basic rate of tax - of their yearly childcare costs, up to a total of £6,000 per child. He said the move will save a typical working family with two children under 12 up to £2,400 a year.

Also, leaked this morning was the news that the Chancellor will raise the income tax threshold to £10,000 from April 2014 – a move he said will give 2.4million people at tax cut of over £200 each a year, as well as lifting two million people out of income tax altogether.
Yet while both moves are widely welcomed, they do little to counter the austere measures of previous Budgets, explains Clare Francis, editor-in-chief at MoneySupermarket.com:"Giving with one hand may be a positive, but taking away with the other through other tax increases and benefit cuts means that people are no better off. "In fact, the cumulative effect of this and previous budget changes, combined with wage stagnation and rising living costs means millions are worse off and an increasing number of families are on the breadline, struggling to make ends meet every month."
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