The government’s Help to Buy scheme is one of the most hyped aspects of the mortgage market at present but there is also a lot of misunderstanding surrounding the deal, which allows those with a deposit of just 5 per cent to acquire a mortgage. Rebekah Commane spoke to two industry experts who explained how the scheme works and highlighted the pros and cons.
With raising a deposit for a mortgage one of the major hurdles in getting on, or taking a further step on, the property ladder, so the announcement that a scheme would be launched which would enable those with just a 5 per cent deposit to take out a home loan was welcomed by the majority.
Help to Buy consists of two elements; the first stage was launched in April and allows prospective homebuyers with a 5 per cent deposit access to at least 75 per cent of the cost of a property through a mortgage, with the remaining 20 per cent covered by an equity loan from the government. These loans are available to first-time buyers as well as home movers on properties up to a £600,000 cost. The loan is interest free for five years and you will begin paying a fee on the six year at a rate of 1.75 per cent, which will subsequently increase year on year based on the Retail Prices Index.
The second mortgage guarantee element was due to launch in January 2014 but was brought forward by PM David Cameron to be launched this October and many are now scrambling to get a piece of the £130 billion pie made of additional mortgage credit. The same maximum property cost of £600,000 applies.
However, some industry representatives fear that an increase in availability of mortgages will drive up house prices creating a bubble similar to that seen in boom times as demand far outstrips supply.
Housing bubble
Speaking to What Mortgage, Brian Murphy, head of lending at Mortgage Advice Bureau, and Paul Broadhead, head of mortgage policy at the Building Societies Association, gave their opinion on whether fears of a bubble have any foundation.
“The balance of supply and demand is challenging at any time, not just due to the introduction of the Help to Buy mortgage guarantee scheme,” according to Broadhead.
“The Help to Buy equity loan scheme has given developers confidence to increase the number of homes that they are building, although there will always be a lag effect as present sites are completed and properties sold.
“The publicity surrounding both Help to Buy schemes has given consumers confidence that the mortgage market is open for business but it should be noted that the schemes are not aimed solely at first-time buyers. If existing mortgage borrowers choose to use the Help to Buy scheme, or other mortgages available with smaller deposits, this could, in fact, increase the number of suitable properties for first time buyers.”
Murphy believes that there has already been an increase in property buyers without a corresponding increase in supply in the market.
“Many of the properties that would be prime properties for first-time buyers are, by nature, first-time seller properties, and it is many of these borrowers who have been constrained from moving in the usual manner as their properties decrease in value resulting in less equity to put towards a new home.
“Even if many of these borrowers have saved deposits or have cash saved to enable them to sell, redeem their mortgage and, in some cases, pay off any shortfalls due to erosion of equity, the majority will not have been able to accumulate large deposits. High loan to value mortgages that would enable these first time sellers to move on have not really been in evidence for several years.”
Price rises
Along with the fear that Help to Buy will put pressure on supply, there is related concern that house prices will rise even further.
“Prices are likely to increase moderately, assuming that we have a reasonable increase in the numbers of properties coming on to the market,” said Murphy. “If we do not see any increase in the number of properties being offered for sale that are suitable for first time buyers then prices could rise faster as demand outstrips supply.”
Broadhead emphasised that 95 per cent mortgages are not new to the market and that steps have been taken to limit inflated house price rises.
“Many building societies have been lending actively to creditworthy borrowers with 5 per cent deposits for some time, so there is clearly capacity to lend. That said, there is a risk that if demand outstrips the supply of homes, then it could place upward pressure on house prices. The government has taken steps to mitigate this risk by granting a role to the Financial Policy Committee of the Bank of England to review the impact of the scheme each September.”
Rental market
With regards to Help to Buy’s impact on the rental market, Murphy believes that there will be less demand on the sector once the scheme fully finds its feet.
“I believe that once more lenders participate in the scheme, and the public become more familiar with what it’s aim is, I do think that demand in the rental sector will abate a little and is likely to put a brake on the almost month on month increase in average rental that is being witnessed.”
Paul Broadhead explains that the impact on renters will depend on individual circumstances.
“The rental market is not a homogenous group of tenants. It is made up of a number of different levels and a range of tenants with differing housing needs. It is possible that some aspiring homeowners may utilise the Help to Buy scheme or other mortgages available on similar terms to exit the rental market but others will find that they are unable to do so. Some will choose to continue to rent as that tenure suits their needs and circumstances well.
“There are large geographical differences in housing markets with City Centres having different features and influences than more rural locations.”
Mortgage rates
Mortgage rates are currently at record lows as Help to Buy causes increased competition in the market, but Paul Broadhead believes the implications of the Mortgage Market Review, which will introduce new regulation for lenders from April next, will tighten up how lenders assess whether borrowers can afford a loan, both now and in the case of a rate rise.
Brian Murphy cited the Bank of England’s base rate promises as a major determining factor on mortgage rates.
“The Bank of England is committed to maintaining low interest rates while the economic recovery is not yet guaranteed.
“It has given what has been termed ‘Forward Guidance’ to markets, consumers and businesses and has set out parameters as to what needs to happen in the wider economy before they would consider raising the base rate of interest. The expectation is that one of the key parameters that would be a benchmark for considering any increase in the base rate of interest is for the unemployment rate to fall to 7 per cent and this is not forecast to happen before the latter part of 2016.”
Specifications
The limit on lending of £600,000 seems like a sizeable amount to borrow, particularly for a single individual, but Brian Murphy says that, as with any mortgage, ability to repay will be assessed of all applicants will be assessed before the loan is granted.
“There are no specific types of home that are excluded from the scheme, although it does not allow landlords to buy or existing homeowners looking for a second home or holiday home, to purchase using Help to Buy.”
He advised those considering applying for a Help to Buy mortgage to speak to a whole of market mortgage broker to understand if and how both the shared equity and mortgage guarantee products could assist them, but also to ascertain if other options exist that may be more suitable.
Paul Broadhead advised looking at all mortgage that are available with a 5 per cent deposit, not just those covered by Help to Buy.
“As far as a borrower is concerned, there is no discernible difference between mortgages inside or outside of the scheme, so do shop around.
“It is important that prospective borrowers manage their finances well to ensure that they have the best chance of meeting a lenders affordability assessment.”
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