Government Loans for First Time Buyers

Government Loans for First Time Buyers

by Rebecca Hall on 29 Mar, 2011

In an effort to stimulate the flagging housing market (and some cynics might say, to grab headlines), the government’s budget for 2011 included an eye catching fund to provide tax free loans to first time buyers.

The number of first time buyers has fallen to 200,000 per year, down from almost 600,000 at its peak. As the Council of Mortgage Lenders (CML) says, this is having a disastrous effect on the housing market, not to mention the financial and social consequences for a generation priced out of the property market and trapped in the rental sector.

The loans will come from a £250m government fund and will be available for up to 20% of the price for a new-build. First time buyers with a household income of less than £60,000 p.a. will be eligible for the fund. With average deposits currently totalling 25% of the price tag, this means that first time buyers will only have to stump up 5% themselves.

The loans will be interest free for the first five years, after which interest will be charged at a below market rate, currently being estimate at 1.75%.

The property market is in a difficult position as it stands. Housing prices have fallen in the wake of the financial crisis, which many would consider to be a good thing given the contribution of vastly inflated house prices to the boom that led to the bust, and given the difficulty for first time buyers in getting onto the property ladder.

However, despite prices being much lower than previously, panicked lenders are now demanding far greater deposits, as mentioned above, around 25% of the value of the house rather than the 10% more characteristic of the boom years. While to a certain extent this is more prudent lending, it means that young people are being priced out of what should be a buyer’s market.

The government loans therefore have two sides to them. Firstly they will be tremendously helpful in getting first time buyers onto the property ladder, allowing them to circumnavigate the higher deposit demands and take advantage of the slump in the market. Secondly, they may well contribute to renewed growth in the market, which may or may not be a good thing.

Although rising property prices (as fuelled by increased demand thanks to the loans, or so the government hopes) will undoubtedly help the economy grow, there is a valid argument that property prices should remain low to keep housing affordable. Similarly, by attempting to recreate the persistent rise in price, we could well be setting ourselves up for another crash.

It could be argued that rather than helping first time buyers on a property ladder of vastly inflated house prices and unreasonably large deposits, the government should be encouraging lenders to lend more readily, although not to the same levels as the pre-crash sub-prime market.

Then again, as some commentators have already noted, a £250m fund doesn’t add up to that much, and the loans could have little more effect than a positive headline on budget day.

About the Author

Rebecca Hall


Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.