British Government's Help to Buy Program

The British government wanted to help the poor people to buy houses.

Hmmmm, where have we heard that from before?

In this year, the British government instituted a “Help to Buy” program that will help people come up with the down payment for a home. In the past, most banks require the borrower to put at least 25% down, whereas now, the government will help cover 20% of the down payment, thereby allowing the homeowner to purchase the house with a 5% down payment.

An FHA-Type of Program?

Sounds like a FHA type of program to me.

However, the plan is that the government will only give the money interest free for the first five years, then after that it will charge something like 1% above inflation.

Hmmmm, a FHA plus a 5-year ARM cocktail, it is going to be quite potent.

In fact, it did boost the market all across the board in the UK. Because many of these people are now allowed to enter the market, there is more competition on houses that are being sold. In addition, many new buyers can enter this program and pay more to get a house that they want. The government thus started feeding the housing frenzy.

While one can argue that this program is going to allow people who have been kept out of the market a chance for home ownership, I think it will create much more damage that it helps. The mortgage market’s requirement of 25% down is meant to keep the market honest and conservative. Suddenly, you have letting people who shouldn’t own homes own one. In essence, it is a form of loosening lending standards, and we in America know how well that had gone before.

Furthermore, the government is setting a ticking clock …read more