Lecture 9: Affordability programmes Flashcards
‘Help to buy’:
- offers assistance to home buyers through these schemes: Equity Loan, Help to Buy ISA (replaced by Lifetime ISA) & Shared Ownership.
- was launched in 2013
‘Help to buy’:
- offers assistance to home buyers through these schemes: Equity Loan, Help to Buy ISA (replaced by Lifetime ISA) & Shared Ownership.
- was launched in 2013
‘Help to buy’ - Equity Loan:
- restricted to new build homes only because it targets first time buyers and home movers
‘Help to buy’ - Equity Loan:
- restricted to new build homes only because it targets first time buyers and home movers
‘Help to buy’ - Equity Loan - Eligibility rules:
- purchased property must be borrower’s main residence
- not for Buy-to-let investors
- borrower can’t rent out an existing home and buy a second home with Buy-to-Let.
- not for financing the purchase of a second home
‘Help to buy’ - Equity Loan - Eligibility rules:
- purchased property must be borrower’s main residence
- not for Buy-to-let investors
- borrower can’t rent out an existing home and buy a second home with Buy-to-Let.
- not for financing the purchase of a second home
‘Help to buy’:
- Government gives buyers an equity loan of up to 20% of the property value (up to 40% in London from Feb 2016)
- equity loan can’t > £120k (£240k in London): i.e. property value can’t > £600k
‘Help to buy’:
- Government gives buyers an equity loan of up to 20% of the property value (up to 40% in London from Feb 2016)
- equity loan can’t > £120k (£240k in London): i.e. property value can’t > £600k
‘Help to buy’:
- a deposit of > 5% of property value
- mortgage should constitute >= 25% of home value
‘Help to buy’:
- a deposit of > 5% of property value
- mortgage should constitute >= 25% of home value
Equity Loan (UK):
- additional borrowing as top-up to the amount borrowed from mortgage provider.
- provided by government
- government becomes a co-owner of the property
- loan is interest only but borrower needs to repay gov’s equity share.
Equity Loan (UK):
- additional borrowing as top-up to the amount borrowed from mortgage provider.
- provided by government
- government becomes a co-owner of the property
- loan is interest only but borrower needs to repay gov’s equity share.
Equity Loan (US):
- a secured loan, i.e. existing home equity used as a security for the loan.
- interest rate lower than unsecured loans
- secured by real estate owned by borrower.
Equity Loan (US):
- a secured loan, i.e. existing home equity used as a security for the loan.
- interest rate lower than unsecured loans
- secured by real estate owned by borrower.
Equity Loan (UK):
- repaid upon sale of house but no later than 25 yrs after loan origination.
- value to be repaid depends on property value at the time of loan repayment.
Equity Loan (UK):
- repaid upon sale of house but no later than 25 yrs after loan origination.
- value to be repaid depends on property value at the time of loan repayment.
Equity Loan:
- Home buyers may decide to repay (part of) the loan at any time.
- minimum repayment is 10% of market value at the time of repayment
- process of less-than-full repayment: called ‘staircasing’
Equity Loan:
- Home buyers may decide to repay (part of) the loan at any time.
- minimum repayment is 10% of market value at the time of repayment
- process of less-than-full repayment: called ‘staircasing’
Equity Loan:
- a gov subsidy:
e. g. if gov gives 20% loan, gov owns 20% of the home value. but gov is not charging rent => subsidy. If house price appreciates substantially, this may offset the rent subsidy from gov.
Equity Loan:
- a gov subsidy:
e. g. if gov gives 20% loan, gov owns 20% of the home value. but gov is not charging rent => subsidy. If house price appreciates substantially, this may offset the rent subsidy from gov.
Equity Loan - 2021-2023 changes:
- restricted to 1st - time buyers only.
- price caps on properties adjusted for # regions.
Equity Loan - 2021-2023 changes:
- restricted to 1st - time buyers only.
- price caps on properties adjusted for # regions.
EL borrower are younger (32 on average)
compared to non-equity borrowers (37 on
average).
EL borrower are younger (32 on average)
compared to non-equity borrowers (37 on
average).
EL borrowers are more likely to be first-time
buyers (73%) compared to 43% of non-equity
borrowers.
EL borrowers are more likely to be first-time
buyers (73%) compared to 43% of non-equity
borrowers.
EL borrowers choose a mortgage with a longer mortgage maturity (29 years) compared non EL borrowers (25 years).
EL borrowers choose a mortgage with a longer mortgage maturity (29 years) compared non EL borrowers (25 years).
LTV and LTI are higher for EL borrowers that nonequity borrowers.
LTV and LTI are higher for EL borrowers that nonequity borrowers.
Pros & Cons of EL:
The amount home owners need to repay
increases with the appreciation rate of homes.
The EL can turn out to be significantly more
expensive way to borrow compared to a
mortgage loan.
The EL can help households that are constrained
in their borrowing.
The EL transfer credit risk from mortgage lenders
to the government.
Pros & Cons of EL:
The amount home owners need to repay
increases with the appreciation rate of homes.
The EL can turn out to be significantly more
expensive way to borrow compared to a
mortgage loan.
The EL can help households that are constrained
in their borrowing.
The EL transfer credit risk from mortgage lenders
to the government.
EL borrowers who repaid without property sale
are more likely to be younger and FTB at
origination.
For these groups the affordability constraint is
more likely to be relaxed with house price
appreciation and household income.
Households are likely to repay EL when they remortgage with another lender.
EL borrowers who repaid without property sale
are more likely to be younger and FTB at
origination.
For these groups the affordability constraint is
more likely to be relaxed with house price
appreciation and household income.
Households are likely to repay EL when they remortgage with another lender.
The Help-to-buy EL programme is an example of
a Shared Appreciation Mortgage (SAM) scheme.
SAMs allows risk sharing between households
and investors and helps reduce default risk.
SAMs reduce affordability constraints.
SAMs allow the separation of consumption and
investment dimensions of households.
The Help-to-buy EL programme is an example of
a Shared Appreciation Mortgage (SAM) scheme.
SAMs allows risk sharing between households
and investors and helps reduce default risk.
SAMs reduce affordability constraints.
SAMs allow the separation of consumption and
investment dimensions of households.
Help to Buy: ISA
Launched in December 2015.
For each £1 saved for a deposit, the government
adds £0.25 bonus up to a maximum of £3,000.
The programme was closed for new savers on 30
November 2019.
Help to Buy: ISA
Launched in December 2015.
For each £1 saved for a deposit, the government
adds £0.25 bonus up to a maximum of £3,000.
The programme was closed for new savers on 30
November 2019.
Lifetime ISA:
- Introduced in April 2017.
The government provides 25% bonus on up to
£4,000 in savings each tax year (i.e. each tax year
savers can receive up to £1000 from the
government).
Individuals between 18 and 39 years of age are
eligible to open an account. The government
provides the bonus up to the age of 50 (i.e.
savers can receive a maximum of £32,000).
Savers can use the funds to buy their first home
worth up to £450,000.
Funds can be invested in stocks and bonds or at
a fixed rate of interest. Capital gains are tax free.
Funds can be withdrawn (including government
bonus) from the age of 60 onward for any
purpose.
Lifetime ISA:
- Introduced in April 2017.
The government provides 25% bonus on up to
£4,000 in savings each tax year (i.e. each tax year
savers can receive up to £1000 from the
government).
Individuals between 18 and 39 years of age are
eligible to open an account. The government
provides the bonus up to the age of 50 (i.e.
savers can receive a maximum of £32,000).
Savers can use the funds to buy their first home
worth up to £450,000.
Funds can be invested in stocks and bonds or at
a fixed rate of interest. Capital gains are tax free.
Funds can be withdrawn (including government
bonus) from the age of 60 onward for any
purpose.
Help to Buy: Mortgage Guarantee:
The government provides guarantee to
mortgage lenders for loans of up to 95% LTV.
Applies only for new bulds up to £600,000.
The scheme was closed on 31 December 2016
(as planned).
Help to Buy: Mortgage Guarantee:
The government provides guarantee to
mortgage lenders for loans of up to 95% LTV.
Applies only for new bulds up to £600,000.
The scheme was closed on 31 December 2016
(as planned).
The Shared Ownership allows first time buyers to
buy only a share of the home (between 25% and
75%) and pay rent on the remaining share. The
remaining share is owned by a housing association.
Available for households with income of £80,000
or less outside of London and £90,000 or less in
London.
Available for both newly built and existing homes.
Home buyers have the flexibility to buy additional
share of the home over time when they can afford
The Shared Ownership allows first time buyers to
buy only a share of the home (between 25% and
75%) and pay rent on the remaining share. The
remaining share is owned by a housing association.
Available for households with income of £80,000
or less outside of London and £90,000 or less in
London.
Available for both newly built and existing homes.
Home buyers have the flexibility to buy additional
share of the home over time when they can afford
Effects on affordability:
Hilber and Schöni (2016) argue that their
effectiveness is very limited. All these policies
affect demand only!
Housing supply is extremely unresponsive to
changes in house prices (due to fiscal
centralisation and rigid planning system).
Increase demand only pushes up house prices
without adequately expanding supply.
Effects on affordability:
Hilber and Schöni (2016) argue that their
effectiveness is very limited. All these policies
affect demand only!
Housing supply is extremely unresponsive to
changes in house prices (due to fiscal
centralisation and rigid planning system).
Increase demand only pushes up house prices
without adequately expanding supply.
Greenbelt = area of land around the boundaries of a town or a city where home construction
is legally not allowed.
Greenbelt = area of land around the boundaries of a town or a city where home construction
is legally not allowed.
