Help-to-Buy set to be very expensive for borrowers

7th October 2013

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First time buyers and many others hoping to take advantage of the second tranche of the Help-to-buy scheme look set to pay hefty interest rate for the privilege. The scheme aims to help banks lend to borrowers with smaller deposits by offering government guarantees on a portion of the loan.

But two issues look set to increase the cost of the mortgage. The first is the Government charge for the help may be higher than expected. It is guaranteeing potential losses on the loans of up to three quarters of the first 20% as the BBC reports.

That is how the banks can increase the amount they will offer borrowers in terms of loan to value from the current 70% or 80% to as high as 95% of the value of the property.

But for reasons of EU law, the Government is charging 0.9% on the whole loan not just the guaranteed portion. As nice little earner for the Treasury as BBC business editor Robert Peston has said, but it puts up the price of the loan. This could fall on borrowers as a fee or probably more likely as an higher rate.

In addition, because the Government scheme has a shelf life of seven years after which the loan liabilities fall fully on the lenders’ books, then regulators are also forcing banks to hold more capital than expected which also puts up the price.

So with the scheme’s actual launch imminent, it looks as if those keen to move or borrow for the first time but who weren’t able to meet the requirement for a high deposit, will now be paying a hefty interest rate. The higher the loan to value say 95% – which will certainly include many first time buyers – then the rate will be higher still. It could be between 5 and 6% as the Daily Mail suggests.

The Mindful view in brief:

There are at least two ways to look at the Help to Buy issue. The first is to suggest that the scheme risks boosting house price, leaving the state with a potential liability, while, for now, stoking prices still further, especially in hot spots such as London. It will allow tens of thousands to own their homes but is not dealing with the really big issue – a lack of supply in the face of a rising population and societal changes that have created many new households. This could mean Help-to-buy doesn’t address the fundamental the problem and many investment and housing professionals have said as much.

The second way to look at this is from an individual perspective. There is clearly pent up demand and those who have been struggling to put away a deposit of 15, 20 or 25% must see this scheme as a huge relief. But if people are already stretching themselves to buy, a high interest rate is something to take into account in terms of affordability. We also wonder how easy it will prove for these people, further down the line, to get themselves better mortgage deals. For now, we must wait to see what the first deals look like. But getting on the housing ladder looks like it will prove a lot more expensive than just a few years previously.

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