When I began this blog, about 4 months ago, Husband and I were on the fence about whether or not to buy a house. We, like so many young first time buyers, were uneasy at the amount of debt we would be getting ourselves into. We came to the conclusion that the mortgage repayments could easily spiral out of control as interest rates inevitably rise. It just did not make sense for our personal finances and budget to get into that much debt.
This week the UK Labour government announced their latest budget for the nation. The Chancellor of the Exchequer Alistair Darling unveiled a tax break for first time home buyers by suspending the stamp duty tax for 2 years for homes under the £250k threshold. But the tax, which is currently 1% of the value of the property sale price, is not what is keeping first time buyers from getting on the property ladder. Don’t get me wrong, a tax break of this sort is better than a kick in the teeth, but the intention of the government by introducing the tax is to try and jump start the property market. The problem is that if other first time buyers are anything like us, this initiative is simply is not enough to entice us into buying our first home. There are several reasons why:
- First time buyers are still struggling to get deposits together. The banks are quite rightly requiring a minimum 10% deposit in order to get a mortgage, and for most people this is a huge ask. And with interest rates so low, savers will take even longer to get the funds together.
- Mortgages in the UK are offered on a fixed basis for 2 years. For us, this is the biggest issue. Once the 2 years are up, you go onto a variable rate – which, although low now, could be as high as 15% in the next ten years. In order to get a 10 year fixed rate mortgage, you need a loan to value ratio of 25% or higher – which is simply not the reality of first time buyers.
- For first time in UK home buying history, incomes are seriously out of proportion to the amount of debt you need to take on in order to buy a home. When the baby boomer generation purchased a home 30 years ago, the rule of thumb was that your mortgage should be 3 times your annual salary. These days, it is more like 7 or 8 times your salary.
So you end up with a situation where first time buyers are trying to get together a deposit to buy a home that costs them 7 times their annual salary. And even if they can just manage to make the initial repayments, after 2 short years they could be in serious hot water. Somehow a savings of 1% on stamp duty tax really does not add up to much.
What would really help first time buyers would be to create a full term fixed rate mortgage, like what we have in the USA. A 30 year fixed term mortgage is the standard in the US, allowing families to effectively work out their personal budgets and see what they can and cannot realistically afford. After all, most first time buyers are starting out in life and may be planning for a family. How can you plan for your future family budget if your mortgage deal is only for 2 years?!
Something else that would help first time buyers would be to expand the home buy scheme – whereby you purchase the percentage of the property that you can afford and the government buy the remainder, which you pay them rent on. When you sell, you get the percentage of the profit equal to the percentage of the property that you own. This scheme was hugely successful, but it is costly. So it is being phased out. Much like the popular car scrapage scheme (intended to boost the car industry) once it starts to actually help people it gets phased out due to lack of funding. It’s just too expensive to have policies that really help people.
What this really boils down to is that the stamp duty suspension was announced to show that the Labour government ‘care’ about first time buyers, without actually having to do much to help them. That is the problem with politics these days – if they really wanted to help first time buyers and jump start the property market they would. But they don’t want to spend money. So they announce lame initiatives which won’t really help people, but which sound good.
It’s funny, all these years I’ve always thought that the purpose of government was to do the best for the people and create a fair and just society. Too bad governments are ruined by politicians looking to be re-elected.
Leila Lacrosse blogs weekly about her attempt to buy a home and start a family in the current financial climate at the American Baby Plan in London http://leilalacrosse.livejournal.com/
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