Money Insider: Help to Buy might help in the polls, but for buyers…

 

David Cameron's party conference bombshell was to announce that the latest stage of the Help to Buy scheme will start three months earlier than the original 1 January launch date.

There's no question that first-time buyers need assistance to get on to the property ladder, but rushing the scheme in before the banks even understand the mechanics of the system smacks more of a desire to boost the Tory Party's poll ratings than delivering a solution for those stuck at home with their parents or in rented accommodation.

The housing and mortgage markets have woken from their slumber in the past 12 months and the latest version of Help to Buy is likely to take activity levels up a couple of notches.

While the scheme will enable more people to buy their own home there is a danger that house price inflation could spiral. This could mean the gap between incomes and house prices widening from their already unaffordable levels and thus putting even a 5 per cent deposit out of reach of many would-be first-time buyers.

However, many experts agree that the real issue the Government is failing to tackle is the housing shortage. According to a report issued by Shelter in July, England is now delivering fewer homes than in any peacetime year since the First World War.

As a result the country faces a large and accumulating shortfall between the homes we need and the homes we're building of between 100,000 and 150,000 a year. If we carry on building at current levels, we will build a million fewer homes than we need every seven years.

The other fascinating aspect surrounding Help to Buy is that the Government seems to be expecting the banks to sign up to support this scheme without understanding what its capital requirements will be, or what the associated costs will amount to.

It wasn't long ago that politicians were ripping into the banks for being reckless yet now they're almost begging them to join Help to Buy without the high street giants knowing what they're letting themselves in for – almost signing up blind.

Similarly, the regulator has become increasingly tough on the level of capital that banks have to hold, with a 90 per cent-plus loan-to-value mortgage requiring about six times as much cover. But with the focus more on winning votes, it appears these prudent controls once demanded by the government may conveniently now not be so important.

Despite these concerns, it appears Help to Buy has given more consumers confidence to buy, with the Santander Mortgage Outlook yesterday reporting that a staggering 5.1 million people are looking to buy a home in the next 12 months, a third of them saying they will use Help to Buy.

Consumers wanting to sign up to the latest scheme can do so from Monday but they will be unable to draw the loans until 1 January at the earliest. Currently only Halifax, RBS and NatWest have signed up, with some of the biggest lenders yet to commit.

Interest rates on 95 per cent mortgages are understandably more expensive than lower loan-to-value advances due to capital requirements and additional risk. Leeds Building Society is offering a 95 per cent LTV, five-year fixed rate of 5.69 per cent with a £199 fee, and Yorkshire Bank has 5.49 per cent fixed for three years with no fee.

Affording the deposit rather than managing the repayments has long been the stumbling block, but the latter may well become cheaper if we get a rush of new 5 per cent mortgage deals hitting the best buy tables.

Although it may deliver welcome relief for new homebuyers in the short term, I fear that the limited supply of housing means Help to Buy will cause even greater issues for first-time buyers in years to come.

Andrew Hagger is an independent personal finance analyst at moneycomms.co.uk

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