UK Government Shared Equity Schemes Proposed for Entry to UK Property Market is a Potential Debt Trap



UK government's latest proposal is to help key workers and lower income workers to continue to be active in the property market by entering into shared equity schemes.

Whilst the schemes will achieve a way to keep the name of the buyer on the title deeds of the property , the long term effect is increased risk of making losses on eventual sale if property prices do no rise enough by the time of sale to repay all the debt taken to buy the property in the first place. Although the beneficial owner of the property will be the person named on the title deeds, the real value will be caught up in the loan owned by the Housing Association if the property value is less than the value of the debt when the property is sold. The full debt will be repayable to the housing association and banks, regardless of how the property market has performed, passing all the risk back to the home owner.

Shared equity allows property owners to reduce repayments on debt to 40% of the capital required to purchase the property at full price. In a standard property transaction, it is not recommended to take on debt of more than four times the annual salary of the buyer, or 90% of the market value of the property , to allow for increases in mortgage rates and avoid the negative equity trap.

The aim of buying property should be to allow the equity value of the property to grow whilst reducing the debt used to purchase the property and making a profit from eventual sale of the property . As household income increases over the life of the mortgage, the repayments should reduce as a percentage of household income to the point where the property owner should be in a position to pay the full mortgage, own a property and live debt free.

The scheme proposed by the government is likely to prevent this favourable position from being reached. The scheme also gives Housing Associations and central government more control over the property and debt markets. By keeping the debt market active, government is able to prevent a market crash whilst keeping the salaries of key workers too low to effectively compete in the open market. Tax payers who participate in shared equity schemes are also contributing to increased government spending of taxpayers' money to keep failing banks afloat.

Current prices in the housing market are sustained by keeping interest rates artificially low which allows prices to keep rising at a higher than normal rate that would be dictated by normal market forces of supply and demand. Affluent property companies can take advantage by selling portfolios off when prices are artificially high. The flood of supply to the market can push prices down causing instability and property market crash to readjust to 'normal' levels.

Nicole Fowler from financial website www.uktaxandaccounts.com comments: 'An alternative strategy to piling more debt on the shoulders of those key workers who can least afford it, is not to allow banks to repossess properties obtained by irresponsible lending and pushing up the salaries of key workers so they can buy properties in the normal way.'





UK Government Shared Equity Schemes Proposed for Entry to UK Property Market is a Potential Debt Trap