UK tax payers at risk from 'Help to buy" scheme

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The government’s controversial mortgage guarantee scheme, Help to Buy part two, attracted criticism from the Council of Mortgage Lenders Chairman Nigel Terrington, who described it as a ‘short-term fix’ at a London mortgage conference last Wednesday.

He warned the conference of the risks inherent in the scheme becoming the UK parallel of Fannie Mae, which provides government-backed mortgages to US homebuyers. Some view the federal stake in the company, which (along with Freddie Mac) was bailed out by the US government in 2008, as potentially placing US taxpayers at risk for their liabilities.

In emphasising the importance that Help to Buy not become a permanent or long-term feature of the UK mortgage market, Mr Terrington called for a clear ‘exit strategy’, showing that the scheme could simply be thought of as akin to an ordinary investment on a massive scale.

With no clear end to the recession, no time frame and no lower-risk scheme set to replace it or ease the transition out of it, Help to Buy is clearly an ‘open’ investment – one which requires a large capacity for risk and shortfall to service.

Open and closed bridging loans

Open bridging loans are those with no repayment plan or exit strategy set in stone at the time of inception. These are higher-risk and the higher fees and interest rates reflect this.

Conversely, a closed bridging loan will have a repayment plan or exit strategy in place. The rates and fees will be more competitive, as this type of loan puts the lender and borrower at less risk of default or unserviceable debt.

Top tips to securing a good exit strategy

A good exit strategy needs to be viable, reliable and achievable within the set time frame.

If the investment is speculative and the exit strategy is the resale of the property or asset, ensure that you know the market conditions and have networked with potential buyers or investors. ‘Headroom’ in the form of sufficient equity will provide a buffer in the event that the re-sale is delayed. It is also helpful to have a back-up plan in the form of a refinancing option.

If refinancing to a longer-term loan is your exit strategy, progress with your application for the loan as far as possible in advance. There will naturally be a barrier to this at some point in the process (hence why a bridging loan is required!) but it may be possible to have at least secured a decision in principle and have the paperwork ready to go as soon as the asset is financeable.

Our advisers are experts in in both the short- and long-term finance market. If you would like to discuss your investment plans and requirements, get in touch for free on the number above or make a bridging loan enquiry.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.

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