The second phase of Help to Buy has been brought forward in a controversial move by the Government, designed to mobilise pent-up demand for housing. We were going to have to wait until next year for this stage, but homebuyers will now be able to apply for a mortgage from this week.
Part one of Help to Buy has been in place since April, providing loans of 20 per cent of the cost of new-build properties worth up to £600,000. This has enabled first-time buyers (FTBs) and home-movers to purchase with a 5 per cent deposit and a 75 per cent mortgage. The loans are interest-free for the first five years, after which buyers pay 1.75 per cent on the loan, increasing annually by the retail prices index (RPI) plus 1 per cent. A similar scheme has now been launched in Scotland, with the Scottish government contributing up to 20 per cent of the purchase price for new builds worth up to £400,000.
The plan is for Help to Buy stage two to run for three years until January 2017 potentially supporting £130bn of high loan-to-value (LTV) mortgages. Again, homebuyers need to raise deposits of just 5 per cent, but this time they can buy existing homes as well as new builds worth up to £600,000 – buy-to-let landlords and anyone who already owns property are not eligible. The 95 per cent LTV mortgages will be backed by the Government for up to 15 per cent of the loan, meaning lenders will be able to claim compensation if the property is repossessed and they are unable to recover all of their money (although they will have to take a 5 per cent hit to discourage reckless lending).
The Government won't actually start offering the guarantees until January 2014, as originally planned, but lenders will be able to sell the mortgages from tomorrow, a full three months early.
It is worth noting that so far only three lenders have confirmed they are taking part in this second phase of the scheme; Royal Bank of Scotland, NatWest, and Halifax. More lenders are likely to follow in the coming months, but the scheme is voluntary and many may decide not to sign up. We also have to wait to see how competitive the mortgage rates for Help to Buy customers will be.
Despite some uncertainty, the scheme will fuel interest from people who would otherwise struggle to raise enough cash for a deposit and "mortgage prisoners" stuck with uncompetitive deals because they don't have enough equity to remortgage or move home.
"The surprise announcement that the launch will be brought forward to next week will certainly be interest aspiring home-movers grappling with the need to build a big deposit," says David Hollingworth of mortgage broker London & Country. "Until we see how the products shape up it is hard to be sure what the market impact could be. But it certainly targets the problem for many borrowers of building a big deposit".
The housing market has already seen substantial improvement in terms of the choice and rates available to buyers with a 10 per deposit to put down, however mortgage availability for those with only 5 per cent remains extremely limited. Rates are also higher as a consequence - for example, a borrower with 10 per cent could get a two-year fix from Skipton Building Society at 3.99 per cent with no fee, while at 95 per cent LTV Newcastle BS charges 5.95 per cent with a £195 fee for its two-year fix.
Supporters of Help to Buy point to transaction levels still well below pre-crisis levels and say the scheme will increase demand for larger properties as well as typical FTB homes in the new build market.
There are risks, however, particularly when you consider that interest rates only have one way to go. Anyone considering taking advantage of the Help to Buy scheme must ask themselves how they would cope if UK rates and mortgage payments rise – on a £150,000 mortgage at 4 per cent (over 25 years) a two percentage point jump would see monthly payments increase from £800 to £978.
Critics have also warned that if new buyers flood in property prices could rise too quickly, cutting future FTBs off and increasing the risk of another crash. House purchase lending has already reached its highest level since 2008 in August, and there were 56,000 more mortgages so far this year than in the equivalent period last year. To complicate matters, this recovery is still being driven predominantly by equity-rich buyers in London and the south-east, while many other regions lag behind.
Richard Sexton, director of e.surv chartered surveyors, says: "If it wants to reknit the heart and soul of the British housing market – and the economy in general – then the Government needs to do more to address the cost of living and think about the regions outside the M25. It also needs to create an economy which encourages more house building so house price inflation can be kept under control, otherwise the next wave of FTBs will have their dreams of owning a home dashed."
The Bank of England has said it will review the scheme annually and take action if it drastically increases house prices, including pulling the plug altogether, although if lenders and borrowers are uncertain about potential changes in terms and conditions over its three-year duration it may not be as popular as expected.
Ben Thompson of the Legal & General Mortgage Club thinks talk of a housing bubble is premature, with the latest Nationwide house price index showing growth in the north of England at only 0.2 per cent, while London saw a 10 per cent boost. However, he says the Government must not duck the issue of housing supply.
"If the UK had asupply and demand balance, many of these initiatives would not be needed," he says. "Being bold and more long-term in outlook would allow more people to buy at a younger age than 38, mean less dependence on parental help, with controlled house price growth and of course, with increased new construction, a boost to the economy".