FEAR OF FINANCE

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The Independent Online
Call me a cynic if you like, but I am completely underwhelmed by the Halifax Building Society's proposal to first-time buyers that they insure themselves against negative equity.

You may have heard about the scheme. It was launched this week to assorted fanfares and drum rolls. Not surprisingly described by the Halifax as providing "future peace of mind", it is designed to tempt first-time buyers - that precious commodity - into the market.

In return for an upfront payment, the society promises that should you wish to move home at any time between five and ten years of starting your mortgage, it will make up the difference if the house is sold for less than the original loan.

On a typical pounds 50,000 loan, based on 95 per cent of a home's value, the fee would be pounds 763, which is added to the total mortgage. But there are snags.

First, you cannot simply be looking to pull out of the housing market, you must buy another house. Second, you must be prepared to take out another Halifax mortgage, even if it is not the cheapest. Third, you must take out compulsory property insurance with the Halifax, when it is not likely to be the cheapest option.

You also have to go through a set of hoops, including trying to sell the property yourself for three months, before the Halifax takes it off your hands. Try telling that to the people next up the chain.

In any case, what the Halifax forgets to mention is that if, as is likely, you add the insurance cost to your mortgage, for a typical 25-year repayment term, you will be paying pounds 2,000 for such cover after interest.

The society also conveniently forgets that for most people it is not just negative equity that stops them moving, but insufficient equity.

That is, in order to move home, borrowers rely on the surplus from the sale of their old property to fund estate agents' and legal fees, plus removal expenses. This is traditionally estimated at about 10 per cent of a home's value.

Of course, it is possible that anyone desperately wanting to move will fund it out of savings or inheritance.

But it is more likely that they will simply put their proposed move on hold, as hundreds of thousands of borrowers trapped by a combination of negative and insufficient equity have already done. In which case the insurance won't be any use at all.

Finally, the Halifax ignores the very real difference between 1988 and today. Then, after several years of meteoric rises, house prices plummeted and stayed low because of the economic recession. Now, despite the marginal increases seen in recent months, they remain lower than at the height of the boom. They are likely to edge up over the next few years, meaning that even if there is another housing recession, they have less far to fall.

I'm all in favour of first-time buyers entering the market if they want to. I am even more in favour of societies like the Halifax, which generally has an excellent reputation, offering succulent deals to tempt people back in.

What I am not in favour of is of mortgage lenders treating prospective customers like morons. In this instance, I believe the Halifax has done just that. The society should stop, before we morons take our custom elsewhere.

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