29th September 2013
The Prime Minister David Cameron has brought forward the help-to-buy scheme by three months. Setting out the case for the Conservative Party as the party of aspiration on the eve of the Conservative Party conference, the PM announced the move in the SunonSunday.
Whether it starts pretty much immediately may depend on whether the Government has set out the full details of how lenders participate and how banks and building societies’ systems will work with the new scheme.
Time will tell if the first loans come early in October or if the details take a little longer than that to thrash out. Effectively if you want to borrow at a 95% loan to value mortgage i.e. with just a five per cent deposit but haven’t been able to afford to, you should be able do so using the scheme.
The lender will supply 80 per cent of the funding and the Government will then guarantee a further 15% though this percentage of the money is also distributed through the lender. Crucially, unlike the first part of Help-to-buy, it applies to existing housing stock and not just to new build so is likely to help not just first time buyers, but those who want to move but haven’t been able to access a loan to do so.
The Government’s potential backing amounts to a rather spectacular £130bn which is certainly nothing to be sniffed of which the Government will be providing £12bn, though whether it ever gets to this level remains to be seen. It comes with the handy benefit for the Government in that it doesn’t appear as Government debt, though some critics may suggest that reality would be a little different were house prices to head south leaving a big liability.
The news comes as quite a shock. On Friday, Mindful Money informed you that if you wanted to participate in Help-to-Buy on existing properties, you might only have 9 months to do so from the start of January next year, before the Bank of England pruned the scheme back.
This was because last week, the Chancellor of the Exchequer George Osborne, facing criticism that the scheme could lead to an overheated housing market, brought forward the date at which it would be reviewed by an influential Bank of England committee, the Financial Policy Committee. The original date for the review had been three years in.
The FPC will now review the scheme in September next year and then do so annually. That move came as Nationwide reported that annual house price inflation was rising by 5 per cent in the country generally and by 10 per cent in London.
With a background of rising house prices, borrowers should bear in mind that the FPC can slow things down in the autumn next year. For example, the scheme applies to properties of up to £600,000. The FPC could lower that level. It could ask that lenders are charged more in fees for the Government backed portion of the loan, which might be tantamount to turning the tap off.
Or, possibly, given that London is roaring ahead of the rest of the country, it might restrict the scheme to certain regions – though once again that begs questions of just how practical or popular such a restriction would be. But altogether, it is clear the scheme may be toned down significantly.
Mortgage market experts also say don’t leave it too late.
Ben Thompson, MD Legal & General Mortgage Club says:”There will of course be some surprise and even some scepticism with regard to this announcement and implementation being accelerated. Right now it remains unclear exactly what the scheme details and specifics are for lenders, and in that regard precisely who will participate other than RBS and Lloyds Banking Group.
“However it is clear that there are potential First Time Buyers and movers who can afford to pay a new and increased mortgage monthly payment, but are having to spend significant time saving for a substantial deposit, larger than at any time in recent decades. This has to be fixed in order that families can live in suitable accommodation and enjoy home ownership in the same way that previous generations have. 95% lending has simply not become high risk overnight.
“Also, bringing the scheme forward potentially enables some to buy or move a few months earlier than originally planned, in some regions saving a little more money, as house prices in some parts are climbing. It’s therefore important not to leave this too late.”
For now the scheme may come as a great relief if first time buyers are determined to get on that housing ladder or have had trouble borrowing enough to make the next move.
You may have a great opportunity to fulfil your wishes, though we suspect that a booming market means the scheme will eventually be restricted and there is an even greater chance of that if you live in London.
So you may well have 12 months. These are very high loan to values thus more risky, so it is advisable to make sure you can really handle such borrowings. Your lender and your broker are meant to assess you for your ability to pay but we suggest you don’t rely on them. Make sure you are confident you can afford it too (even when the scheme has the backing of the PM).
And a final word about housing policy more generally from Mr Thompson.
“The Government must also however not duck the issue of housing supply. If the UK had an appropriate supply and demand balance, arguably many of these mortgage and housing initiatives and stimuli would not be needed. This has to be the medium to long term aim. Being bold and more long term in outlook, and getting this strategy right, would allow more people to buy at a younger age than 38, would mean less dependence on parental help, controlled house price growth and of course with increased new construction, a boost to the economy.”