Ray Boulger (pictured) is senior technical manager of John Charcol
The changes to Stamp Duty Land Tax announced in the Budget for first-time buyers are headline grabbing and will certainly provide a very useful saving for most people who looking to get on the property ladder and buying a property for less than £500,000.
However, by introducing the change only to first-time buyers, a group the Chancellor felt he needed to help for political reasons, he has created other problems.
Based on definitions the government has previously used to define a first-time buyer some purchasers who consider themselves to be a home owning ‘virgin’ will be excluded.
- Example one: a son or daughter who helped a divorced parent buy a property because the only way to prove adequate affordability to a lender was to use their income as well. The property was bought on a tenants in common basis with the son or daughter owning only 1% but always considered by both to be owned by the parent, who pays the mortgage.
- Example two: a young couple buying together for the first time where one of the two previously bought a cheap property as a buy-to-let to get a foothold on the property market. But because the property’s value has fallen and they are in negative equity they can't afford to sell it as that would require using some of the savings for a deposit.
These are just two examples of the types of people who might feel aggrieved as they would consider themselves to be first-time buyers.
Admittedly, whilst these people may feel this way they would be in the minority.
This problem could have been avoided if the Chancellor had introduced a change targeted at, but not limited to, first-time buyers - such the Help to Buy equity share schemes, where 80% of the borrowers are first-time buyers.
A targeted scheme could also have helped first-time movers who don’t have the benefit of being able to use the profit on the sale of their first home to provide a deposit and pay stamp duty because their property has fallen in value.
Another issue is that the Chancellor has re-created a problem his predecessor eliminated when he removed the previous cliff edge system.
Although not many first-time buyers will be buying at over £500,000 the stamp duty for any first time purchase at £500,001 will now be £5,000 more than for a purchase price of £500,000.
A marketing tactic used by some house builders is to say they will pay the stamp duty as an incentive.This of course is really a thinly disguised price reduction but developers will now have to think of a different gimmick or alternatively, in the interest of transparency, they could just reduce the price.
There have been suggestions that this reduction to stamp duty will be reflected in an increase in house prices as buyers can now afford to pay more.
Whilst it is true that anything which increases buying power is likely to push house prices up it will be impossible to prove, what impact on prices, if any, the stamp duty reduction for first-time buyers will have.
This is because there are so many competing factors which affect house prices.
Two particularly relevant points here are that only some first-time buyers will benefit from the changes and even then the maximum mortgage they can obtain will not increase.
Therefore, I doubt there will be much impact on prices.
Older borrowers
The Chancellor said he intends to make it easier for pension funds to invest long term, but he didn’t elaborate in his speech.
It will be interesting to see how he intends to do this but one low risk opportunity for long term pension fund investment is to provide 15 – 30 year fixed rate mortgage funding.
Currently the maximum anyone under the age of 55 can fix their mortgage for is just 10 years.
Buy-to-let
The Chancellor also announced a consultation on longer term tenancies.
This is welcome, although not really a Budget issue. Some large scale landlords have offered their tenants longer term tenancies but the take up has been relatively low, suggesting that the majority of tenants value flexibility to move over the security of tenure.
However, it must be right for tenancies of different lengths to be available, even if not every landlord offers all options.
It does need to be recognised that a longer term tenancy imposes additional obligations on both landlord and tenant and one consideration, as with a 5-year fixed rate on a mortgage, is what happens if the tenant wants to break the tenancy early.
With reference to buy-to-let mortgages most lenders still restrict the length of an assured shorthold tenancy to 12 months and so if lenders want to be pro-active ahead of a legislative change, which is surely coming down the road fairly soon, they will amend their criteria to allow longer term tenancies.
Saving for a deposit
The Chancellor said: “It takes too long to save for a deposit” but then failed to announce any measures which will address that problem, although the Stamp Duty Land Tax reductions for first-time buyers on all properties up to £500,000 will mean most first-time buyers will no longer also have to save for the stamp duty land tax as well as the deposit.
The very obvious solution to the problem the Chancellor identified but failed to address is to reduce the minimum deposit required by lenders for borrowers who don’t have family help (schemes like Barclays’ 100% Springboard Mortgage are useful for those which do).
There is no magic reason why loan to values on mortgages should increase in multiples of 5%, just because they always have done.
Disruption in the mortgage market is currently limited to fin-tech companies trying to do things in a different way, but disruption of criteria is more difficult, not least because of regulatory restrictions.
However, if the Chancellor really wants to help the deposit problem he has acknowledged perhaps he should do the obvious thing and facilitate smaller deposits.
A first step would be to encourage a mortgage loan to value of, say, 97.5%.
As all high LTV mortgages are now only available on a repayment basis, whereas up to 2008 100%+ mortgages were available on an interest only basis, it needs to be recognised by regulators that a 97.5% loan to value repayment mortgage is a very different, and much less risky, proposition and that, assuming no change in property prices, the loan to value of a mortgage which started at 97.5% could fall to 95% in just over a year.
