Writing in today’s Daily Telegraph, Ian Campbell explains:

The problem stems from lack of funds for both lending banks and first time buyers. Lending banks previously relied on deposits made by UK savers backed up by borrowing from residential mortgage-backed securities (RMBS) – two thirds of RMBS were sold to foreign investors. Then, in 2008, the RMBS market ceased to exist, having been bought by the US Federal Reserve. The Bank of England set up two special funding schemes to help fill the gap left by the RMBS but both are due to end in 2014. When that happens, the Council of Mortgage Lenders calculates that Britain’s lenders will face a funding gap of £300 billion.

These are the facts behind the rise in deposits – first-time buyers are being asked for almost three-times the deposit they would have put down three years ago. No wonder then that, whilst mortgage approvals improved last year, they only reached half the levels of the boom years.

So, lack of funds leads to lower house prices; the average would have to fall 17% for the ratio of price to earnings to get back the long term level of 4 from the current 4.8. The powers that be need to make a concerted effort to prop up growth and earnings if the property market isn’t to fall even farther than before.

Tax payers money will be used to help first time buyers buy their first home.

Because of the credit crunch there are thousands of new homes that are vacant and the developers are not able to sell these homes unless they give them away at bargain prices. But are they really a bargain? Take a look at prices and some have halved in value, which only shows just how overpriced they were in the first place.

Although a nice new flat or home is great to move into be very aware of the tricks offered by developers. Free carpets, kitchens and other lures look good to most buyers and the advantage of 2 years rental cover or stamp duty paid also help investors over the line but think, look and research hard to see what are the REAL values of these properties? Take a look at the Gumtree.com to check against a wealth of real asking prices in the area, the Gumtree offers an excellent guide to real life rental values. Where does your proposed investment sit between these other offers, be realistic.

Once again be very aware of flats with no land. Land is the key to value as supply of flats with no land can easily be diluted with another 10 storey residential block being built right next door. There is little scarcity in flats with no substantial outdoor space.

Critics say that new initiative may end up backfiring and the very people it is supposed to help and they could end up in negative equity. However the scheme allows you not to pay back the loan if the house drops in value when you sell it. If the house goes up in value you must pay the full loan back.

When the economy was booming it was not uncommon practice for the banks to offer 100% mortgages or more. Now the Home Buy scheme allows people with a household income of less than £60,000 to borrow the deposit from the government. Also the property developer matches the government to make up the deposit.

So first time buyers would receive a 100% mortgage.

It is likely the government will make first time buyers meet strict requirements in order to be eligible for financial assistance.

This scheme sounds too good to be true or is it?

On the surface it appears that the government are letting down first time buyers who really need support in these difficult financial times.

It seems that people who have bought properties and lost their job are being looked after, they have been given a 2 year grace period with their mortgages. However the mortgagor needs to be receiving unemployment benefits or state benefits.

So the interest over a 2 year period can be paid back after 2 years, at this point hopefully the borrower will be able to pay for the interest.

The big problem is that many people may still not have enough money to pay back the loan in 2 years, it is unlikely that the economy will improve significantly within this period of time.

If the borrower is not able to pay back the interest after 2 years, then tax payers will have to pay back the bank.

It seems that the UK is being further split into the wealthy and the poor, this can create social and economic problems which are difficult to fix.

Do you think the government are doing enough to help first time home buyers?