This week saw the start of the much-anticipated, sometimes heavily criticised, Help To Buy Scheme. Actually it was the second part of the Government Scheme, the first part of which started some time ago.
Whilst many are confused which is which, the aim of both is at least crystal clear – to increase the availability of mortgages for those with small deposits and get more people onto the housing ladder.
So what is the difference between Help To Buy 1 and Help To Buy 2?
Help to Buy 1
Only available on New Build Properties through a participating house builder, this is a loan scheme for mortgage borrowers.
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 15,000 buyers so far which has encouraged builders to plan a 30% increase in their building plans, slowly increasing the supply of property.
Help to Buy 2
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.
Key Features of Help To Buy 2
- 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.
- The guarantee last for 7 years
- Scheme to run for 3 years but reviewed each year by the Bank of England who can change the terms if house prices are rising too fast
- Available on properties up to £600,000
- Not just for First Time Buyers, 2nd or many time movers can apply and it is available for remortgages
- UK residents and foreign buyers who meet the lenders’ usual criteria may apply
- Applicants must only have one property anywhere in the world
- Not available for Buy To Let and you won’t get consent to let
- Must be a repayment mortgage and in personal name
- Borrower must have good credit – no arrears in last 12 months, no CCJ more than £500 in last 3 years and not been 3 months late on any loan in last 2 years
- Lenders will assess closely and adopt a tight affordability assessment which the government will spot check
According to figures from Zoopla this means that over 665,000 properties in the UK will be eligible to be purchased through the scheme, whilst a separate study by Santander found that 1 in 10 people were looking to buy next year with a third looking at using the scheme.
Lenders and Interest Rates
Initially only the state backed lenders Lloyds and Natwest / Royal Bank of Scotland are offering products this week with others following towards the end of the year.
Natwest have confirmed 2 products available up to 95% LTV of £600,000. One is a 2 year fixed rate at 4.99%, whilst the other is a 5 year fixed at 5.49%. There are no lender fees.
Meanwhile Halifax are offering a 2 year fixed rate at 5.19% with a £995 Arrangement Fee.
Although these rates may seem high, they actually compare pretty well. The majority of rates currently on offer for 95% LTV involve parental help or guarantees, whilst existing “clean” 95% LTV products are 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.
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 more lenders are involved in January 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.
So far Virgin Money, One Savings Bank, Aldermore, Santander and HSBC have also confirmed they will be involved, whilst others are waiting and seeing.
Issues & Politics
The extraordinary announcement by the government to bring the scheme forward from the original January launch smacked of political point scoring rather than sensibly thought through logic.
By unexpectedly introducing the scheme earlier, the Government hope to have avoided a situation whereby further economic improvement and a naturally busy last quarter of the year without this scheme would make more people question its need altogether.
One of the main issues with part two of the Help To Buy scheme was that there was some concern whether lenders would be ready to introduce the scheme in January, let alone October. Hence only the State-Backed lenders have products ready.
For lenders, it is not just as simple as pricing products, but systems need to be put in place which could mean a two-tier product offering.
The biggest concern however, 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.
Will It Work?
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.
In reality, apart from a flurry of initial calls and declarations of intent, I do not see that much happening until the turn of the year, at which point more lenders will have had more time to prepare, take in the full details and employ the additional staff and valuers needed to deal with higher demand.
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.