13th March 2013
Earlier this week the Confederation of British Industry asked for Government help for first time buyers to be extended to second time buyers to help them get another rung higher on the housing ladder. One day later it looks as if it has got its wish. The CBI may be one of the most important and certainly the most influential employer trade bodies in the UK but that is quick by anyone’s lobbying standards.
The Guardian reports that the Department for Communities and Local Government is working on a package to help those second time buyers in the belief that a bottleneck has developed just above first time buyers. It has generally been thought that if first time buyers got on the ladder then the effect would be felt higher up the housing chain. That has not really happened in practice. The reality is that with interest rates at very low levels, it has been an excellent time to have paid off a large percentage of your mortgage. Rates for mortgages at a loan to value of say 60 per cent present very good value. The banks can lend at low rates while taking on very little risk. They even have a source of money available from Government to lend known as funding for lending though this is not good for savers as Henderson’s chief economist Simon Ward pointed out on Mindful Money earlier this week. However at higher loan to values, mortgage rates are a lot higher.
Intriguingly the NewBuy scheme is currently being touted by the Government to help some of these existing homeowners with limited or even negative equity. In the case of limited equity, we can understand. It may be difficult to get a high loan to value mortgage and this could help with a move though it still important any borrowers assess their individual financial circumstances. However, we see this as more of an issue where there is negative equity. Can Government cash really spring that trap and to what end exactly?
Perhaps a more pressing issue and one the Government should certainly consider is the number of borrowers who got on the housing ladder using interest only mortgages, who do not have a repayment vehicle, and so are currently paying off the interest on the loan but not the loan itself. It was once thought that rising house prices would mean that such borrowers could always sell and trade down. But especially in some parts of the country this is also proving increasingly difficult. A term not applies to them – mortgage prisoners.
Some of the answer for these borrowers may rest with regulation which is making it very difficult for these borrowers to remortgage as the financial watchdog the Financial Services Authority clamps down on new interest-only mortgages without a clear demonstration that they borrowers also have a repayment vehicle for the main mortgage sum. But there are no easy answers for those already on these mortgages and we suspect it will take more than an extension of the New Buy Scheme to really help.
More generally, a small but significant and even more uniform rise in house prices would help spring a negative equity trap for many. Alas that is not within the Government’s gift.
A rise in household incomes would be welcome too but whether you think we face a treble dip or not, that also does not look likely for some time to come. Pay rises have been few and far between. This may have supported employment meaning that at least house prices have a floor of support and the situation is much better than it could be. But it certainly doesn’t make it easy to break the logjam. Maybe it is a case of every little helps.