As part of the recent budget George Osborne launched ‘FirstBuy’ – an official scheme to help first time buyers on to the property ladder - so what is it all about?

Osborne says that the new scheme – costing £250m over the next 2 years - will help over 10,000 first tome buyers.

The scheme – scheduled to be up & running by – September will be open to households with an income of less than £60,000 who are able to put down a 5% deposit, though it will only apply to newly built properties within specific developments Successful applicants will be eligible for an “equity loan” worth up to 20% of the value of the property which will mean they will be able to take out a 75% loan-to-value mortgage for the remainder.

For the first five years the equity loan will be interest-free, then in the sixth year interest will be charged at 1.75%, and at RPI inflation plus 1% following that. When successful applicants come to sell their home (or after 25 years) they will have to pay back the loan. The amount due to be repaid will remain at 20%, regardless of the market value at the time of the sale.

Nicholas Leeming at property site zoopla.co.uk pointed out that, according to the Council of Mortgage Lenders, first-time buyers are currently paying an average deposit of £25,000. “This would plummet to an initial £6,250 as a result of the new scheme – a very appealing prospect.’’

He  also said that the scheme “won’t go beyond scratching the surface of the problem faced by the vast majority of first-time buyers, as it’s exclusively for new-build properties, and only around 11,000 buyers will benefit – a fraction of the overall number of potential first-timers”, he adds. “Mortgages are still required, and this scheme leaves lenders, who have had a stranglehold on the market for the last two years, in a win-win situation. Being able to lend to a select group of first-time buyers without the normal level of risk makes lending to those who don’t qualify for the scheme even less attractive.”

The equity loan will be jointly funded by the government and house builders, & is likely to be on a 50/50 basis. The government will be keen for as many developers as possible to sign up, so that properties will be available in most or all regions, though it is reported that of the £250m allocated to the scheme, £210m is earmarked for England, with the remaining £40m to be shared between Scotland Wales & Northern Ireland.

Barratt Homes is already promoting the scheme on its website, where people are invited to register their details for more information. The scheme is likely to be run by the Homes and Communities Agency in England which looks after the various HomeBuy schemes introduced by the previous government.

A sceptical Matt Griffith from the first time buyer pressure group PricedOut had this to say about the scheme: “When independent economists are predicting a 10% fall in house prices this year, having the government encouraging first-time buyers to get on to the ladder using a 5% deposit looks foolhardy at best and, at worst, pretty irresponsible.”

He added: “George Osborne is behaving like a shopkeeper trying to shift overpriced stock by offering a clever financing scheme. Consumers would be wise to be sceptical and steer clear – the big problem is that prices are still far too high. Its main purpose appears to be to help bail out the house building sector – which is suffering from buying too much expensive land at the peak of the boom.”

The US unemployment rate has risen above 10% for the first time in 27 years, leaving the US in a state of despair.

President Barack Obama will hold a jobs summit on Thursday, focused on job creation.

Although he has included business leaders amongst the 130 experts attending the summit in Washington, Republicans in Congress will opposed to any major spending plans.

President George W Bush has already frustrated them by spending billions on bailing out the banks and car makers.

The “big government” image and creating big financial defecits to be paid for by future generations are unpopular in Washington.

Economy.com’s Mark Zandi believes deficits are a major worry, but we can’t afford to be concerned about it now.

“That’s a problem not for 2009, not for 2010. That’s a problem for 2011, 2012 and beyond,” he says.

“We have to make sure that we don’t go back into a recession, because if we go back into recession, the cost to taxpayers will be even greater.”

“The deficits will be measurably larger, so I think it’s important to spend more money now.”

According to Mr Zandi, government spending needs to be aimed at assisting local government offices, as with tax funding falling, many employees are at risk of losing their jobs.

President Obama is on the look out for new ways to combat unemployment.

Unemployment benefits usually run out after six months in the US, but have been extended because of the highest unemployment rates.

Mr Zandi believes continuing with providing benefits to the unemployed as essential to maintaining demand, as those with no money make no purchases.

That situation could develop into a ‘catch-22’, downward spiral, as consumers that don’t consume, results in businesses cutting their workforce, causing more unemployed with no money to spend.

Another area where Mr Zandi feels the government can make a unique contribution is providing credit to small and medium-sized businesses.

Banks are still cautious over lending after the credit crisis, but have always given capital to start-up companies to help them expand, and these new businesses usually provide America with the majority of new employment.

Mr Zandi believes that “it’s clear that even when the economy gets back on its feet, we’re going to have very high unemployment in many parts of the country for a long time to come.

“One reason is that the people out of work don’t have the skills and education necessary to be employed in the jobs of the future.”

The most important factor when choosing to manage your personal finances effectively is time. A greater time investment will almost always result in a greater financial return.

Therefore the sooner you start to manage your finances, the greater return and financial ease you will feel in the future. Many people fail to plan ahead, which results in struggling to juggle finances at a later point in life.

Money management should focus on four primary questions:

1.       What financial goals would you like to achieve?

2.       When can you expect to achieve them?

3.       What finances do you currently have?

4.       What level of risk would you make to achieve these targets?

Choosing somewhere to live is an essential in everybody’s lives, and therefore, buying a house will be the biggest financial purchase that people will make. The financial investment into a home will affect all your other finances.

Making big decisions on your lifestyle will affect your financial goals. If you consider a luxury holiday to be one of life’s essentials, you will have less money left over for savings and investments.

When do you want to retire? What expenses do you currently have? Deciding what your priorities are will help to determine what money you will have left.

It is worth assessing your current liabilities, as these expenditures and assets could be reduced or sold and free up money for the future.

Calculate how much spare money you have so that you can form an investment plan. Investments can vary dramatically. Some are high risk for higher reward or loss, and some are low risk for a steady growth on investment. It’s up to the individual to decide what level of risk you are prepared to make.

Once these considerations have been made and your plan is in places, it’s important to assess the decisions you’ve made and how they affect you on a day to day basis. You plan may be too restrictive, leaving you with not enough money to live on, or perhaps you could make greater short term sacrifices to benefit you in the long term.

A small amount of time spent on your current finances can be highly rewarding for your future.

Plans to split British bank Northen Rock in two which would allow for its partial sale has been granted by the European Union.

The divide would result in two separate banks forming and are already being described as the “good” and “bad” banks.

The “good” bank would offer new lending, retain some of the existing mortgages and hold its savers’ money.

The “bad” bank would be used to repay the existing government loans and hold the remaining loans.

 Decisions made by the EU to accept the move are seen by Northern Rock as “an important and positive step.”

Changes to the existing setup will be made towards the end of the year.

The EU revealed that the good portion of the bank would be expected to grow and then be sold to third party, with the bad bank allowing its assets to dissolve then becoming liquidated.

The good bank may be sold prior to the general election next year with potential buyers being speculated already, with Virgin and National Australia Bank, owner of Clydesdale and Yorkshire Bank, among the interested parties.

EU Competition Commissioner, Neelie Kroes, believes that the move would make the bank a good long-term option, revealing that “this decision demonstrates once again that the EU’s state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage.”

Whilst Jonathan Todd, European Commission spokesman, said caps would need to be applied for the duration that the good bank remains owned by the public.

Some of the caps include a balance sheet reduced to a quarter of its size prior to the crisis, not being the market leader for loan interest rates, a cap set to limit its lending to one-third of Northern Rock’s 2008 levels and also a cap on retail deposits to be slightly lower than the pre-crisis level.

An investigation was engaged by the EU into Northern Rock in April 2008, two months after its nationalisation.

The results from the investigation showed that the UK government was kept at a “necessary minimum”.

By 30 June, the bank had paid back approximately half the taxpayers’ £26.9bn loan and will gain a further £8bn from the government during the end of year restructuring.

The EU stated that the restructuring would reduce its market share to below half of its pre-crisis level and “correct the excessive expansion of Northern Rock pre-crisis.”

Northern Rock released a statement, saying “this approval is an essential requirement of the planned legal and capital restructure, which is central to the business plan for Northern Rock.”

“The restructure will strengthen the capital and liquidity position of Northern Rock significantly, and offers value for money to taxpayers” and it would be “business as usual” for its customers.

According to official figures, the UK experienced an unexpected contraction of 0.4% for the third quarter, showing that the UK is still stuck in the recession.

This quarterly contraction is the sixth consecutive contraction, the worst run of figures that UK gross domestic product (GDP) has experienced since records began 54 years ago.

The GDP of a country represents the value of goods and services produced by a country. The figures released may be altered at a later date, as this is just a first estimate.

The Office for National Statistics (ONS), had been expected to show quarterly growth of 0.2%. However, no growth in retail sales for September and a 2.5% fall in industrial output for August had dented people’s positive expectations.

Experts have revealed that one of the main causes of the contraction was an unexpected drop in the services sector, with distribution, catering and hotels generating some of the worst figures.

Nearby countries France and Germany exited the recession earlier this year, and it is generally considered that the UK’s reliance upon the services sector, and more specifically, the finances sector being the main reason.

The UK economy has now experienced a 5.9% contraction since its high point prior to the recession.

The Bank of England is set to re-think its quantitative easing plan after seeing such a poor result in GDP figures. Quantitative easing involves the Bank of England printing money to buy bonds from companies and banks in an effort to encourage positive activity in the economy.

HSBC’s Bronwyn Curtis spoke with the BBC, revealing that “back in August we had a worse-than-expected second-quarter GDP number and that is the reason that the Bank of England extended the quantitative easing programme,”

ING’s James Knightly felt that the data was “awful with no positive news” and “clearly suggests that the likelihood of an expansion in quantitative easing by £50bn or so over the next quarter is rising, although [it] is not a foregone conclusion.”

It is considered by many experts to be disturbing that measures taken by the government and the Bank of England have failed to make a positive impact. However, David Kern, the chief economist with the British Chamers of Commerce believes that “continued intervention - including help for businesses to access finance, and incentives to promote investment - is still needed.”

“Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed.”

Alistair Darling has announced that the government must borrow its way to recovery and believes that it’s the best avenue for the UK economy in the long run.

The Chancellor of the Exchequer confessed that further national borrowing “may feel counter-intuitive,” but “will mean the bills we face as a country are lower” in the long run.

However, many believe that the levels of government debt are already too high, with cuts in public spending and tax rises required. The government has already raised borrowing during the recession by high amounts.

Following Mr Darling’s speech, a question-and-answer session was held, with the chancellor finding agreement with Mervyn King, the Bank of England Governor, stating that there were “no simple answers” when it came to the reform of big banks.

According to Mervyn King, their core business may need to be divided into other practices to prevent them from becoming so big that they aren’t allowed to fail.

Mr Darling was concerned that “we cannot have a regulatory regime that excludes the possibility of failure.”

He went on to state that the banking sector needed more competition, and when the government came to selling its bank stakes that were bought during the financial crisis, it would be hoping to develop greater competition.

Many are calling for a reduction to the borrowing and spending that has caused so much debt, but Mr Darling believes that withdrawing government support would be “wrong and dangerous,” and the country would have to make a big decision.

At a speech in London, Mr Darling declared that “we can resign ourselves to a decade of austerity, low growth and low employment, or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring.”

He continued by warning that withdrawing government support to the economy “would put the recovery at risk and abandon people facing unemployment.”

In a bid to encourage demand during the recession, the government has pushed billions of pounds into the economy through its £175bn quantitative easing plan, cut the VAT rate and helping ailing banks.

According to Mr Darling, a great deal of work was still required to steer the country out of the recession, including three big steps.

“First, we must support the economy until we’re sure the recession is over. Some are tempted to think the crisis is over. It’s not. Banks all over the world are still dependent on government support.”

The second step would involve raising taxes to regain financial strength and taking “tough choices on public spending for the years ahead”.

He added, that it “will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future.”

His third step would involve a government plan of growth.

“We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.”

Whilst the general financial atmosphere is improving and optimism growing, it is too soon to announce that we are in the process of recovery, according to experts at Ernst and Young Item Club.

The influential professional services firm expects some growth towards the end of 2009, but this growth should begin to struggle, with 1% expected growth for 2010.

They also predicted that customers repaying debt will grow slower than first anticipated and impending tax rises will follow the election.

BT Business research predicted a more optimistic outlook, declaring that small businesses are positive about the forthcoming year.

In September, BT Business conducted a survey of over 7000 small businesses and found that 75% believed their business would see an upturn in 2010, with 61% confident about their business’ prospects.

Professor Peter Spencer, Chief Economist from the Item Club, issued a wake-up-call to all those getting carried away with the optimism of recovery.

He warned, “there could still be substantial pain to come for corporates and consumers.”

“For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening.”

One of the factors holding back growth is that the VAT rate will return to 17.5% from its current level of 15% on 1 January, a change which may see consumers making purchases before the New Year.

Several other factors which will hold back growth lie on the horizon. An increase in national insurance contributions, the new 50p tax rate, the termination of the car scrappage scheme, tighter government spending and the return of stamp duty on housing are all due to hit the country.

Judging whether the recovery is happening, on the way or unlikely is difficult to forcast.

Professor Spencer went on to tell the BBC that the recent economic data has been “very mixed,” adding, “the stock market is absolutely rampant, industrial surveys all back in positive territory, but it’s yet to show through in hard data for output and things like that.”

“And when it comes to lagging indicators like unemployment, I’m afraid it’s going to be ‘feel bad’ for quite some time to come.”

On Friday, the official statistics for the Gross Domestic Product (GDP) are released, with many expecting no economic growth at all.

GDP is a measurement of the services and goods produced in a country, and since the first quarter of 2008, the UK GDP has been in negative figures.

The Bank of England has focused on quantitative easing, an act of pushing money into the economy. Professor Spencer feels that this has been of little success, with the little improvement on bank lending, going on to complain that “instead, the banks appear to have used much of the money to rebuild reserves and improve liquidity.”

The Council of Mortgage Lenders (CML) has revealed that the number of new mortgages granted for August is down by 3,000 from 56,000 in July to just 53,000.

Despite such a large fall in granted mortgages, this is still 29% higher than last year’s figure for August.

The CML believe that house sales may have reached a plateau, as most first-time buyers still have to provide large deposits.

Overall, the total value of mortgage lending for buy-to-let and remortgaging for the past year is down by 36% on last years figures.

Long Recovery

The CML’s economist, Paul Samter believes “house purchase activity has revived from its moribund state at the beginning of the year.”

“It will be a drawn-out recovery process with seasonal ups and downs, but house purchase activity is now on a firmer footing.”

According to the CML’s figures, first-time buyers need to find on average 25% deposit in order to receive a home loan.

Regardless of whether a borrower is a first-time buyer or not, two-thirds of all mortgage deals require at least a 25% initial payment.

Relaxing

The Bank of England has claimed that the number of new mortgages approved in August, but not lent, has fallen for the first time in eight months.

From 52,317 approvals, down from 52,404 in July, is a sign that levels may be beginning to level off in the coming months.

Data shows that the number and value of house purchase loans is higher than a year ago, the total value of mortgage lending has dropped by a third.

Standard variable rates are very low, giving borrowers much less incentive to remortgage their house or seek out fixed rate mortgages elsewhere. Buy-to-let mortgages are also down  on a year ago.

“At £12.3bn, gross mortgage lending - which encapsulates all mortgage lending activity, including house purchase, remortgage and buy-to-let lending - declined 36% from August 2008,” the CML reports.

House Prices

The autumn of 2007 saw the onset of the credit crunch, with house prices taking a sudden downturn. Over the past few months, house prices have been steadily rising, giving hope that the recent recovery may become more prolonged.

House prices rose by 2.8% in the 3 months leading up to September, in contrast to the 3 months prior according to the Halifax; the first quarterly increase for two years. Further support to the encouraging recover was made when the Nationwide confirmed that house prices have risen continuously for the past 5 months and have returned to the level of September 2008.

Sales have doubled between January and August and the market seems much more stable in comparison.

Experts have warned, however, that the rise in house prices is supported by the shortage in new properties being put on the market. If there is a sharp rise in houses placed on the property market, the rise in house prices may come to a sudden halt.

The Advertising Standards Authority (ASA) is looking closely at loan adverts and price comparison sites, saying that social responsibility is key in the midst of the current recession.

The watchdog has said that companies currently have many landmark rulings that they must refer to in terms of standards to adhere to.

It has also ruled against firms that have misled viewers or made consolidating debts seem trivial. It is also considering adverts encouraging consumers to put their various debts in one pot to pay off.

A Lenders trading body has said that the companies do take their responsibility seriously when dealing with customers.

The ASA says that the recession has affected the quality of advertising and kinds of appeals made to customers: “The economic downturn makes it even more important to protect consumers from being misled.”

The chairman of the ASA said the authority should be ‘vigilant’ for consumers sakes.

The adverts being looked at include many that are online. Price comparison websites are becoming increasingly popular and therefore need to be moderated.

Are Adverts Purposely Misleading?

The company has banned some adverts for financial products and price comparison websites such as the advert for Picture Financial Services in which a man plays football while being filmed by his wife who is also applying for a loan at the same time.

The report states that: “The ASA council found the advert to be misleading for implying that consolidating unsecure loans was a decision that could be taken lightly.”

Due to the steady rise in the number of people using price comparison sites, the number of complaints has also risen about adverts that make comparisons all over the place. This has increased 14% in 2008 compared to the previous year.

The report adds: “Our priority here is to ensure that ads do not mislead consumers and to help provide a level playing field where companies can make legitimate claims about their products and services,” also saying there have been issues with exaggerated or unclear price comparisons.

The ASA rules state that:

- Documentary evidence is needed to back up competitive claims

- Any compared products must be of very similar quality, and sale prices must be compared to other sale prices

- Customers must be given enough information to make any decisions themselves

- Exaggeration of length of time prices have been lowered should be avoided

The ASA predict more complaints this year.

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Loan lenders, including banks, are facing severe restrictions on their sales of lucrative loan insurance.

Payment protection Insurance (PPI), is meant to repay borrowers’ loans if they fall ill or lose their jobs, but are currently costing borrowers over £4billion.

According to the Competition Commission, lenders will no longer be able to sell PPI when they grant a loan, or for seven days afterwards.

Though, borrowers will still be able to approach their lenders about buying PPI policies 24 hours after taking out a loan.

The Commission expects PPI providers to meet its requirements regarding giving consumers better information by April 2010, and will introduce new measures in October 2010.

The Competition Commissioner also added it would have “lower prices and better choice.”

Their deputy chairman, Peter Davis, said: “the ‘point-of-sale’ advantage has meant that leading providers have faced little competition for PPI and, as a result, have charged persistently high priced.

“Consumer’s interests are not best served when the only choice the vast majority have is whether or not to purchase their credit provider’s PPI product.”
“The resulting lack of competition means that the only offer consumers get is simply worse value than they are entitled to expect.”

Currently, there are over 12million PPI policies enforced, mainly sold alongside credit cards, mortgages and personal loans.

Louise Hanson is head of campaigns at Which?, and said:“For too long too many consumers have suffered from shoddy, expensive and inadequate protection.

“It’s a great shame that since we began campaigning for better products, many people have wasted millions of pounds on PPIU and have been ripped off in the process.”

Association of British Insurers’ (ABI)s’ Nick Starling said:
“The point of sale ban carried significant risks for borrowers, mainly by leaving them unprotected at a time when unemployment cover has never been needed more.

“Figures released only yesterday by the ABI show that in November 2008 there were 19,105 new unemployment claims on PPI policies.”

The recommendations were first drafted in November, though changes have been made since the original draft was made, including reducing the moratorium to seven days, but it still goes ahead with banning its proposal to ban sales of ‘single premium’ PPI policies.

These involve the full premium being added to the loan up-front, which inflates the borrower’s interest bill, and also tends to lock in customers who may want to change their PPI policy.

Five of the major UK banks have already taken up the recommendation after pressure from the Financial Services Authority (FSA).

The Commission are also enforcing other services involving lenders providing PPI quotes and annual policy statements for customers.

Stephen Sklaroff of the Financial and Leasing Association said: “by preventing customers from protecting their repayments at the time they take out a loan, the Commission has made it much less likely that they will do so at all.

“Many more people will go without the safety-net provided by PPI, just when unemployment is reaching record highs.”