When Help to Buy was announced in the Budget back in March, many critics pointed out that the shared equity element of the Chancellor’s plans would help home builders as much as first-time buyers.
What's more, it's now transpired that the scheme is resulting in questionable marketing of properties.
How Help to Buy works
Under the shared equity form of Help to Buy the buyer puts down a 5% deposit and gets a 20% equity loan funded by the Government through the Homes and Communities Agency. The remaining 75% is borrowed as a mortgage in the normal way, but with the benefit of enjoying the lower rates available on 75% loan-to-value (LTV) mortgages.
There are no charges on the equity loan for the first five years. After five years, the home owner has to pay interest on the outstanding 20% at a rate of 1.75%, with this rising by inflation plus 1% each year after that.
It’s paid back when the property is sold as a proportion of the sales price.
Misleading pricing
But some cheeky developers are marketing their properties at prices 20% below the correct asking price, implying that the equity loan is a discount or free gift.
Mortgage trade magazine Mortgage Solutions found that Bloor Homes was advertising a new-build home in Silsoe, Bedfordshire, at a headline price of £440,000. However, when you read the small print the full price was £550,000 and the deduction was based on the Help to Buy 20% equity loan.
Meanwhile the Daily Telegraph found a property for sale by Taylor Wimpey, priced at £439,500, also advertised separately at £351,600 – indicating that the property was cheaper than it actually was.
Industry experts say slicing money off the price implies it is a gift from the Government, when it’s not. It’s a loan which has to be repaid.
Misleading mortgage rates
I spotted an interesting advert from Fairview Homes in the Metro last month. It was advertising new homes in South Norwood, South-East London, with an “amazing 2.74% APR mortgage”. The small print said the deal would require a 5% deposit, 20% equity loan and 75% mortgage.
[SPOTLIGHT]It described the mortgage as “indicative available through a High Street lender on a similar FirstBuy scheme”.
The rate seemed rather low so I asked round a few mortgage brokers to get their views.
One told me that the only mortgage he could find at that rate was from Nationwide and was a two-year fix at 2.74%. Crucially, after two years the rate reverted to Nationwide’s standard variable rate (SVR) which currently stands at 3.99%.
APR calculations take into account the total interest cost over the 25-year term of the mortgage, plus fees. So the APR on the Nationwide deal would be nearer 4% than 2.74%.
If the Fairview advert was to be accurate it would need to advertise the mortgage as a “two-year fixed rate at 2.74%”.
Explanations
Homebuilders have come out with a range of explanations for their misleading advertising.
Fairview New Homes told me in a statement: “The Equity Loan element of the “Help to Buy” stimulus was announced on 20th March effective from 1st April. At its initial launch, regrettably, there was a lack of information available from leading mortgage providers clarifying their products and rates for the scheme. The HCA, however, advised that this would be replacing the FirstBuy initiative with “similar” mortgage products.
“The most favourable FirstBuy mortgage rate that existed at that time was 2.74% (two-year fixed) by Nationwide based on a 75% loan to value over a 35 year term, subject to purchaser’s status qualification.”
However, the statement doesn’t answer why Fairview have described an initial two-year rate as the APR. To be fair, I’ve kept an eye on Fairview’s more recent adverts and they seem to be displaying more accurate mortgage rates.
Meanwhile a Taylor Wimpey spokesperson said that the property was marketed at two different prices to reflect the different methods of purchase available. A spokesperson said: "Listing on online portals in this way enables customers to find the property in price-related searches. We are trying to help customers understand the scheme and the options available."
I might be cynical but I’m tempted to think home builders are deliberately out to deceive naïve first-time buyers. What do you think?
> Fancy winning £50? We’ve got five £50 prizes in a draw for anyone who answers one of our Lovemoney surveys.
More on buying and selling property:
Government’s Help To Buy scheme slammed
Average house price to hit £300,000
The most affordable cities to buy a house
The hidden cost of buying a new build