Stamp duty exemption finally unveiled
The government has confirmed a shake-up to stamp duty rules that will see properties of £175,000 or less exempt from the controversial levy.
The move is part of a host of measures unveiled today designed to kick-start the housing market. The stamp duty relief will apply on all properties (under £175,000) on or after 3 September 2008 and before 3 September 2009.
Other measures include offering “free” loans to first-time buyers earning less than £60,000. The HomeBuy Direct loans will be interest-free for five years and will enable eligible buyers to raise deposits of 30% on new-build properties. It will be co-funded by the property developers as well as taxpayers.
Although the loans are interest-free, borrowers will be obliged to pay a fee at the end of the five-year period. However, it is not yet clear how much the fee will be or how people’s affordability will be calculated when applying for a mortgage.
Finally, the government has also launched what it terms a mortgage rescue package to help homeowners struggling to meet their repayments and at risk of repossession.
As part of the package, local authorities will assess local families and offer assistance to the “most vulnerable” and those not deemed to have “acted recklessly or irresponsibly”.
Those deemed worthy will then be offered one of three options:
1. Sale and rent back: a registered social landlord will pay off all secured debt on the property and the resident can then rent the property at a “level they can afford”.
2. Shared ownership: a registered social landlord buys a share in the property. The money raised can be used to pay off part of the mortgage.
3. Shared equity: a registered social landlord provides an equity loan to the householder, which again can be used to reduce the mortgage.
The government is also cutting waiting times for people applying for financial support from the government to help meet their mortgage payments. From next spring, homeowners will only have to wait 13 weeks for support rather than the current 39 weeks. And the upper ceiling for the size of mortgage that will be met is being raised to £175,000.
Communities secretary Hazel Blears says about 10,000 people will benefit from the HomeBuy loans.
She adds: "This government is committed to practical action to help those most affected by the current state of the housing market.
"We are working to make sure everyone struggling to pay the mortgage gets support and advice. We are giving a leg-up to first-time buyers keen to own a place of their own.
"And by bringing forward our investment in social housing, we are both getting more decent, affordable housing ready for people to live in sooner, and helping the house building industry weather tough times."
What's the catch?
The measures have been welcomed by the industry, but experts say they do not go nearly far enough in helping homeowners. In addition, the measures are unlikely to be enough to kick-start the housing market or help the majority of homeowners.
Ray Boulger, of brokerage John Charcol, says the new stamp duty
measures are not the answer to helping to avoid a house price crash. He adds "One has to question
whether the government has truly thought this through."
Andrew Montlake, a director at brokerage Cobalt Capital, agrees and says the measures are a “damp squib”.
“The stamp duty exemption is a half-hearted gesture as it is only £50,000 more generous than current levels, plus it won’t make much impact in London and the South East where property values are higher,” he says.
“By leaking its plans to increase stamp duty, the government created an expectation of making a big move to help homebuyers – but this measure does not live up to this expectation.”
The stamp duty leak effecitvely brought an already weak housing market to a stand-still as buyers withdrew offers in the hope that delaying would mean they could avoid paying this tax.
The finer details of the HomeBuy Direct loan are also a concern to Montlake. Because the loans will only apply to new build properties, he says they will not help restart housing transactions and the property ladder will remain stagnated.
In addition, he believes the measure is more about the government trying to help developers and meet its housing targets rather than the property market.
“New build properties are notoriously hard to value, because you pay a premium for the fact it is new – so why would you want to encourage a first-time buyer to take out a mortgage and a loan (albeit an interest-free one) for 100% of a property that will deplete in value straight away?” he asks.
The mortgage rescue package also fails to impress Montlake. “The devil is in the detail,” he says.
For one, the scheme is aimed specifically at vulnerable families at risk of repossession. Therefore, the scheme will not reach the vast majority of homeowners hit by the credit crunch. Nor will it do anything to increase confidence among buyers or ease pressures among lenders.
“The two biggest issues are a lack of consumer confidence and a lack of mortgage lender liquidity,” says Montlake. “Until banks and building societies have the funds to be able to offer more mortgages to more people, the housing market will remain stagnant.”
What should have been done?
Although the measures have largely been welcomed, many experts agree that they are not the answer to blockages in the housing market.
So, what could the government have done instead?
One of the main issues dragging the housing market down is the lack of mortgages. Although rates are currently falling, lenders are still demanding big deposits from borrowers and a lack of funding for banks means that the future of the mortgage market remains uncertain.
Lenders have been calling for help from the government for some time.
Michael Coogan, director general of trade body, the Council of Mortgage Lenders, says funding problems are a “fundamental bar” to the housing market’s recovery.
“We believe that the focus of the government's attention should be at least as much on market funding as on consumer-targeted measures,” he adds.
Mortgage brokers agree. Boulger, from John Charcol, says the stamp duty exemption will only help a small minority of people, and is not the answer to the bigger problem.
“The issue lies more with mortgage lenders and their ‘shut up shop' attitude to lending above certain loan-to-values,” he explains. “The government needs to address this situation above all others."
And Cobalt Capital's Montlake says the measures fail to address issues from the perspective of the whole property market. The stamp duty exemption, for example, will only help people buying from the cheaper end of the market, while the HomeBuy loans are only suitable for first-time buyers of new build homes.
“It is not enough to just help first-time buyers – the government needs look at how it can help the whole housing market, and all homeowners and buyers within it,” Montlake says.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.