At present lenders require deposits of approximately 20% of the value of the purchase price before a mortgage will be granted. For many, providing this type of cash upfront is not possible. The Government therefore introduced the NewBuy scheme to encourage the growth of the property market. Lenders in return for the Government’s guarantee must accept an initial deposit of just 5% of the value of the property. Such a scheme should encourage first time buyers who were previously unable to gain a footing on the property ladder.
It is hoped that this scheme will initially prompt the sale of an additional 100,000 newly built properties. Although this number is arguably too small to have any significant effect on the national property market many may see this as a welcome opportunity to progress from rented accommodation.
In order for a buyer to take advantage of this scheme, the following factors will need to be present
- The Buyer must find a home marked by the builders as a ‘NewBuy’ home.
- The Buyer must then approach a Lender who is taking part in the scheme. (at present Nationwide, Barclays and NatWest)
- The Buyer must also be capable of raising cash to the extent of 5% of the purchase price.
It should be made clear that other than instigating a reduced deposit of 5% for the buyer, the scheme in no way offers any state subsidy to buyers. If the unfortunate situation were to arise in which a failure to meet payments arose, one would still be held liable to repay the mortgage. Therefore although the scheme has its obvious advantages, Buyers should be aware of the risks of taking a mortgage, especially one in which the loan will have been much greater than if they were to put down an average deposit. With today’s property prices continuing to fall across Britain, prospective buyers should be aware that they do run the risk of negative equity i.e. being left with a debt that is greater than the value of the purchase property.
Therefore a buyer should always consider the prospect of their financial security as well as the state of the property market before making such a large commitment. One of the main disadvantages of the NewBuy schemes is that it is only available to the purchase of newly built houses. Such property can be pricier than if you were buying the equivalent home that had already been lived in, as some new-built properties carry an additional premium on the sale price that can reduce as soon as the property is occupied.
The NewBuy scheme offers first time buyers an opportunity to get on the property ladder without having to front up a large amount of cash. This is good news for those who are desperate to move out of rented accommodation or their parent’s home. However, with the uncertain economic climate, a large mortgage and a house price with additional premiums it may not be the most economically sensible decision. It is arguable that a buyer may be best placed to wait and save up for the larger deposit. If a buyer is struggling to achieve the 20% deposit required it begs the question as to whether they are ready to be buying a property in the first place ?
For additional information please contact Edward Worthy on 01245 493939 or worthye@gepp.co.uk
The above is not legal advice; it is intended to provide information of general interest about current legal issues.
