New measures aimed at helping homebuyers to get on, or move up, the property ladder were announced by the government this week – including a state-backed mortgage guarantee scheme.
FT Money analyses the “Help to Buys” proposals, to answer the key questions about their impact on the wider housing market.
What are the main policies?
● A shared-equity scheme open to all homebuyers purchasing a new-build property up to value of £600,000.
● A mortgage guarantee scheme to back deals of up to 95 per cent loan-to-value, for all property types up to the value of £600,000.
How does the shared-equity scheme work?
From April 1, the government will extend its existing FirstBuy shared-equity scheme to all homebuyers, not just first-time buyers. Buyers with a 5 per cent deposit will be able to borrow up to 20 per cent of the value of their property from the government, securing the rest from a normal mortgage provider.
The loan will be interest-free for the first five-years, after which buyers will have to pay an annual fee of 1.75 per cent of the loan, rising annually by retail price inflation plus 1 per cent. Borrowers can repay the loan at any time.
Who can apply?
Most buyers can potentially make use of the scheme but buy-to-let investors and second homeowners are excluded. Unlike FirstBuy, the Help to Buy scheme will be available to all buyers, regardless of their personal income.
The scheme will run for three years and is expected to help around 75,000 homebuyers. All lenders and housebuilders will be able to participate in the scheme.
What’s the catch?
It’s a shared-equity scheme, which means the government will take a 20 per cent portion of the property’s value – including any uplift – when the owner sells it or repays the loan.
The shared-equity loan will only be available on new-build properties. Buyers can only take out the loan on a capital and repayment basis and will have to meet normal affordability criteria.
How does the mortgage guarantee scheme work?
From January 2014, buyers with a minimum deposit of 5 per cent will be able to secure a 95 per cent mortgage from participating lenders.
The scheme will see the government provide lenders with a guarantee of up to 15 per cent of the mortgage in an attempt to encourage banks and building societies to offer loans to borrowers with small deposits. This mean that if a borrower defaults on their loan, the state will be liable for a proportion of the losses.
Who can apply?
The mortgage guarantee scheme will be available to anyone, except buy-to-let landlords, buying a property up to the value of £600,000. Unlike the shared-equity scheme, the guarantee will apply to all property purchases, not just newbuilds.
Buyers with a deposit of more than 20 per cent will not be able to access the mortgage guarantee. The scheme also has the potential to help so-called mortgage prisoners – borrowers who cannot move home or remortgage because of a lack of equity.
There have not yet been any exclusions of people using the scheme to buy second homes, although this could change following a consultation with the industry. This has led the Labour party to dub the scheme a “spare home subsidy”.
Like the other Help to Buy scheme, this will run for three years and according to Savills, the property agent, could help an estimated 550,000 buyers.
I’ve found it hard to remortgage, can I access the scheme?
Yes. The details of the scheme say it can be used by borrowers simply looking to remortgage to a better deal, rather than only when people move home.
However, there will be certain rules to ensure that lenders cannot just use the scheme to restructure the riskiest parts of their existing loan books. For this reason, borrowers that want to access the scheme would have to remortgage with a different lender.
Will I be able to access this scheme from all lenders?
Not necessarily. The scheme is voluntary, so it is up to each provider whether they want to take part. Lenders will have to pay the government a fee to be given the guarantee and they will have to take a 5 per cent share of net losses. As a result, many banks will need to decide whether it is feasible commercially.
A crucial part of the discussions will be centred around whether lenders will get capital relief from banking regulators for these loans. Lenders currently have to hold around eight times more capital for loans over 90 per cent loan-to-value. Under the government’s NewBuy scheme, Barclays was able to secure capital relief.
Lloyds Banking Group and Royal Bank of Scotland have already committed to taking part in both schemes, while others such as Barclays, Santander, HSBC and Nationwide, said they will wait until the details of the guarantee scheme have been finalised.
Will the mortgage guarantee mean lower mortgage rates?
Hopefully. It should help boost the number of high loan-to-value mortgages, which should mean more competition on rates.
However, the mortgage rates will be set by lenders and as they have to pay a fee to access the guarantee this could mean they will look to recover these costs from borrowers via higher rates or big arrangement fees.
What are the risks?
Critics of the schemes say it will inflate house prices even more, making houses ever more unaffordable for future generations. Experts also point to the fact that the schemes fail to deal with the real problem: a lack of housebuilding.