There has been a lot of talk about the Governments, sometimes heavily criticised, Help To Buy Scheme which was introduced last year. Actually it was the second part of the Government Scheme, cunningly called Help To Buy 2, the first part of which started some time ago.
The issue is that many are still a little unclear about what the scheme does, why there are two parts and which is which.
At its’ crux, the aim of both is actually crystal clear – to increase the availability of mortgages for those with small deposits and get more people onto the housing ladder.
With this in mind we thought we would update our guide to help shed some light on the matter.
So what is the difference between Help To Buy 1 and Help To Buy 2?
The original scheme that is only available on New Build Properties through participating house builders, is a equity loan scheme for mortgage borrowers.
Under this scheme, the Government offers a loan of 20% of the property’s value to people with a 5% deposit. The buyer therefore only needs a 75% Loan-To-Value (LTV) mortgage from a lender.
The loan itself is interest free from the Government for 5 years after which time a fee of 1.75% is paid which increases by RPI + 1% each year.
When the property is sold the Government is paid back 20% of the sale price.
This scheme has actually worked very well and has attracted over 25,000 buyers so far which has encouraged housing starts to increase by 23%, according to Housing Minister Kris Hopkins.
The difference with this Scheme is that as far as the borrower is concerned this is just a normal 95% LTV mortgage, available under certain conditions (detailed below).
Where the lender is concerned however, this is a guarantee scheme for them, offering an ‘indemnity’ or insurance cover of up to 15% of the loan amount, which will compensate them for most of the cost, if borrowers of higher loan-to-value mortgages default on their mortgage payments.
The lender does pay a fee for this protection; 0.28% for 85% loans, 0.46% for 90% loans and 0.9% for 95% loans. This is not paid by the borrower although it will of course have an impact on the rates offered.
Interestingly, this lender fee charged is paid on the whole loan amount so in the short term the government could make some nice money!
Most importantly, it has been confirmed that participating lenders will gain an element of capital relief on the guaranteed portion, meaning lenders do not have to put as much money aside to cover the loan, freeing up more cash to lend out.
Aim to encourage lenders to offer more 85%, 90% and 95% mortgages
The government provides the lender with a guarantee, which the lender pays a fee for, of up to 15% of the loan amount. This is not a loan to the borrower but simply insurance between the lender and the government.
According to figures from Zoopla this means that over 665,000 properties in the UK will be eligible to be purchased through the scheme.
When the Prime Minister announced that the scheme would be bought forward without warning, (political reasons), initially only the state backed lenders Lloyds and Natwest / Royal Bank of Scotland offered products with others following in due course.
As well as the above we now have lenders such as Aldermore, Barclays, HSBC, Virgin Money and Santander participating with even the Post Office looking at releasing products shortly.
The effect this scheme has had on the availability of 95% LTV products is pretty substantial, with a knock on effect giving other lenders such as the Yorkshire Group the encouragement to offer their own 95% LTV products outside of the official scheme.
In fact, according to Moneyfacts, the number of products available with just a 5% deposit has jumped from 42 products to 145 since October alone.
Rate wise, whilst these products seem high given the low Bank Base rate, historically speaking the rates are pretty competitive.
HSBC have rates available from 4.79%, (4.2% APR) for a 2 year fixed rate, whilst Santander have a 2 year tracker rate available at 4.74%, (4.9% APR) with no penalties and a free valuation.
In the 3 year fixed market Barclays have an offering at 5.35%, whilst 5 year fixes range between 4.99% and 5.49%.
Before this scheme, the majority of rates on offer for 95% LTV involved parental help or guarantees, whilst “clean” 95% LTV products were priced between 5.5% to 6%, so with this in mind increasing the availability of products at this level with rates starting from 4.99% is better than many expected.
The lowest 95% deals currently available are through brands associated with the Yorkshire group, with Chelsea currently at 4.89%, (5.7%) for a 2 year fix, although 5 year products have recently increased due to increases in longer term Swap rates.
Even those who may be able to access the bank of mum and dad are considering the Help To Buy deals as a way of putting in less deposit day one and using the other money they have on other things, such as furniture or keeping a rainy day fund.
For others however, the overall pay rate is more important than keeping back cash and whilst you can obtain 90% rates around 1% cheaper than the Help To Buy products, along with a slightly easier underwriting process, for those that can it does make sense to put in a higher deposit and enjoy the lower payments.
We will not really see the effect of the scheme until later in the year as the new lenders involved release their figured, but we are already seeing clients re-evaluating their options and considering utilising the scheme even though they do not need to.
It should be noted that anyone hoping for a return of cheap and easy loans are likely to be disappointed however. Lenders still need to price for risk, guarantee or not, so rates are likely to stay at a similar level, at least until more competitors enter the market next year.
The biggest concern, which has created some fierce economic and political debate, is of course the fact that the increased surge in demand, when the supply of property has not increased, could create a house price bubble especially in places such as London where prices are already jumping.
Part of the fear is that in artificially pushing up demand in this way, it only serves to push up house prices further and thus pricing out the very buyers it has been designed to help, whilst those who have worked hard to save up for a bigger deposit will feel hard done by that they are now competing for precious properties with those who have maybe not been so prudent.
Whilst the Chancellor has sensibly given the Bank of England power to fundamentally change the scheme should such an event look evident, the reality is that many areas of the UK are a long way from experiencing the growth in the property market needed for a healthy economy.
The reality of the situation is that 95% LTV market has been decimated over the past few years and there is certainly a demand to see this type of product return at sensible levels. There are many potential buyers who have been watching the property market with dismay as prices continue to rise who need to move or get onto the property ladder but have only been able to save smaller deposits.
The costs of renting is often more expensive than current mortgage costs which makes saving for a deposit especially difficult.
Although many borrowers will be delighted to see an increase in products available with smaller deposits, they should be under no illusions that this will not be coupled with a return to the easy credit policies of the past.
Guarantee or not, lenders are still making a risk based decision to lend and will have a duty of care to make sure any borrowing is only taken by those best placed to afford such a loan.
Together with the onset of the Mortgage Market Review coming in April, this means borrowers will need an A-class credit score, good income and affordability will be scrutinised carefully.
Initial statistics are very interesting and in the first couple of months of operation most of the uptake was outside of London, with 80% of the loans going to First Time Buyers according to Halifax.
With an average loan of £157,660 it was clear that actually it was being used where it was needed.
If the aim was to increase demand, confidence in mortgage availability and generate activity, well it seems to be doing the job. Whether it translates into more people actually getting a property they can afford remains to be seen.
We all need a healthy, sustainable housing market and let’s face it, Government intervention in the Housing Market previously has never been a happy adventure in days gone by. Even if this does work well and house prices are kept in check, there is a danger that this becomes a drug that we cannot bear to give up.
How we exit these schemes could well be the toughest test of all; just think Fannie Mae and Freddie Mac!
Either way, especially in London, it’s all hands to the pump for everyone in the property market.