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Incentives Are Disguising Real Condition Of UK Property Market

by Jim ONeil on April 5, 2011

in Mortgages

The property market seems to have a short memory. A mere three years after the credit crisis, Northern Rock is offering first-time homebuyers 90 percent mortgages.

Despite its increasing deficit, the government is working with developers to lend deposits to first-time buyers. These down payments are being used to purchase expensive new homes in a market expected to fall throughout the year.

To top this off, the national lettings agency Belvoir, which is under investigation for questionable lending practices, recently announced no money down programs for buy-to-let investors.

These offers have not been seen since the booming property market of the last decade. They allow individuals to make an investment without actually investing anything.

During the boom, property values were inflated so investors could receive larger mortgages. Investors used the excess money to pay off their temporary bridging loans and fixers fee from property clubs.

Lenders scrambled to increase volume and prices rose until everything collapsed. This situation reeks of mortgage fraud but it is happening all over again.

Developers and the Council of Mortgage Lenders recently issued rules that the arrangement is not fraudulent if the lender is notified of it by the vendor and buyer’s solicitor.

If lenders choose to lend, they are not likely to accept an incentive over five percent. Though this is less than the previous 25 percent difference between price paid and official price, it can still distort new construction prices because the market is slow.

Even the Vendor Gifted Deposit raises related issues because it is a large-scale cash back incentive. It manipulates the loan-to-value ratio of mortgage loans, possibly inflating property prices.

Some believe that the negative results of incentives are exaggerated. Others say it is dangerous to send the message that more favorable loan-to-value lending than is offered by banks is a way to make homes more affordable.

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