The big news this week in the property market is the early release of phase two of the government's Help to Buy (HTB) scheme. Originally planned for release in January 2014, the scheme will accept applications from 7 October 2013.
Consumers have grown accustomed to a limited supply of 95% mortgages ever since the recession, so the news of a bumper delivery ahead of schedule will rightly cause a wave of excitement. The Help to Buy 'mortgage guarantee' has a clear purpose and will answer a real need by giving options to first time buyers and those homeowners who have seen their equity eroded and been unable to make their next move. It is undoubtedly a welcome initiative from a consumer point of view.
A key ambition over the next three years must be to re-establish 95% lending as part of a balanced and normally functioning market. With the government behind it, the market looks set for continued growth which will hopefully prompt a greater level of overall transactions and more willingness from lenders to get behind those buyers with limited deposits.
Clearly there will be a flurry of activity as lenders bring their implementation and delivery plans forwards, once the final details of the scheme are confirmed. The important thing is for consumers to get clear, consistent messages about the mortgage guarantees, how they work and where they are available. Rather than becoming an overnight sensation, it would be in everyone’s best interests if the scheme is managed in a steady and sustainable way.
Kevin Hollinrake, Managing Director of Hunters Property Group says, "The result of the early start for the Help to Buy scheme is that there will very soon be more buyers looking for property so it’s a very good time to put your house on the market".
Help to Buy Guide - Your Questions Answered
Help to Buy – what's that?
The scheme announced by George Osborne in March's budget is the Treasury's attempt to encourage banks and building societies to offer mortgages to homebuyers with small deposits for properties of up to £600,000. The first part of the scheme (called Help to Buy Equity Loan Scheme) began in April. It allowed first-time buyers, and movers who want to purchase a new-build house or flat, to borrow 20% of the property's value from the government. Those loans were interest free for the first three years; all borrowers needed was a 5% deposit and a 75% mortgage.
Who is eligible – and for what types of property?
-Existing home owners and first time buyers
-Buyers with a minimum deposit of 5% of the purchase price
-Buyers who are borrowing from a participating lender
-Available in England on New Build properties up to £600,000
-Residential property, where you plan to live in it and not rent it out
-Your only property, so you cannot have an interest in any other property, anywhere in the world
How does it work?
You’ll need to put down a deposit of at least 5% of the property price, the government will give you an equity loan for up to 20%, interest free for the first 5 years, and you’ll need a mortgage of 75% to cover the rest. As a result of providing you with this assistance, the government is entitled to its money back, plus a share in the future sale proceeds equal to the percentage contribution it made to assist your purchase. This type of loan is known as a ‘shared equity’ mortgage.
When will I have to pay back the Equity Loan?
The home will be in your name, which means you can sell it at any time. However, you’ll have to pay back the Equity Loan when you sell your home or at the end of your mortgage term – whichever comes first. You can also pay back all or part of your Equity Loan without selling your home.
Are there any fees for the Equity Loan?
You won’t be charged loan fees for the first 5 years of owning your home. But in the 6th year, you will be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year in line with inflation. The annual increase in the fees is worked out by using the Retail Prices Index (RPI) plus 1%. For instance, if the RPI is 5% at the end of Year 6 of your Equity Loan, the fee will increase by 6% from 1.75% in Year 6 to 1.86% in Year 7 (which is 1.75% + (1.75% x 6%) = 1.86%). Your mortgage adviser can provide you with a more detailed illustration when they help you with finding the right mortgage.
A government-appointed Help to Buy agent will contact you before the fees start, to set up monthly payments with your bank. You’ll also be sent a statement about your Equity Loan each year.
What are the interest rates on the mortgage loan?
Lenders offer more competitive rates to borrowers with bigger deposits as they carry less risk. This scheme means that they are only lending 75% of the property value rather than 95% which means you will benefit from cheaper rates of interest than you would otherwise.
What lenders are involved?
A wide range of mortgage providers are involved in the equity loan. Major lenders participating in the first scheme include Barclays, Halifax, Nationwide, NatWest, and Santander. More lenders are joining all the time, and Virgin Money has announced plans to enter the scheme in November.
There are also Help to Buy mortgages available from smaller lenders such as Chorley, Leeds and Newbury building societies, although these may be restricted based on the location of the property.
Is this scheme pushing up house prices?
Although there are some fears the mortgage guarantee phase of Help to Buy will cause a rise in house prices, there are no such fears over the first part of the scheme. This is because the first phase of Help to Buy is linked to housing supply – only new build houses are eligible, which encourages builders to increase production and keeps prices at a steady level.
How many sales have been completed under the scheme?
Figures released in the last week of October showed 15,410 reservations had been made in the first six months following the scheme’s launch. This compares favourably with schemes like NewBuy which attracted far fewer sign-ups.
So how is phase II different?
It will see taxpayers underwrite up to 15% of a mortgage for loans where a buyer has only a small deposit, of 5% (or more) of the property's value. Lenders who want to offer mortgages of up to 95% loan to value (LTV) but do not want to take on all of the risk will be able to buy a guarantee from the government for up to 15% of the loan. This allows the lender to claim on the guarantee if the property is ever repossessed and sold at a loss. This second phase was expected to launch in January 2014, but the government now says it will go live in the coming days – although it is not clear when lenders will start to use the scheme.
What will the 'mortgage guarantee' guarantee?
The government will compensate the lender if the property is repossessed and it is unable to recover all its loan from its sale. The deposit would be lost first, and then the government would cover the next 15% of loss. But the lender will also have to take a 5% hit on the government's compensation, to deter it from making reckless loans.
How would that work in practice?
For example, a customer takes out a 95% mortgage on a property costing £100,000, providing a £5,000 deposit. The lender takes out a guarantee with the government for 15% of the property's value.
Subsequently, the lender repossesses the property, and only raises £65,000 by selling it. The deposit is wiped out, and the guarantee then pays out £14,250 – the 15% of the loan covered by the guarantee, less a 5% cut. The remaining £15,000 loss falls on the lender – which would have lost £30,000 without the guarantee.
How long does the guarantee last?
It will be valid for up to seven years after the mortgage is taken out.
What if the property goes into negative equity?
The guarantee will not help the buyer or lender if the property falls in value. It only kicks in if the borrower falls into difficulty with the mortgage and their home is repossessed.
How much will it cost lenders?
This is still the big question, as the price of the guarantee is fundamental to the scheme's success. If it is too expensive, there will be no point in lenders using it. If it is too cheap, it could potentially break European rules on state aid. The Treasury has said it will offer bands of prices based on the LTV of the mortgage, with higher LTVs likely to cost the most as they are the riskier deals.
Will every lender offer it?
Probably not. Industry insiders predict that some lenders will not take part in the scheme. Just three have signed up so far – Royal Bank of Scotland, NatWest, and Halifax.
How much will it cost the taxpayer?
The government has said it will put £12bn into the scheme, which is expected to run for three years. It would lose money in cases where a mortgage holder defaults, and a repossessed property is sold for less than the outstanding mortgage value, even after the mortgage holder's deposit is wiped out. But it should make a profit on loans where the guarantee is not triggered.
Who will be eligible?
Both first-time buyers and movers can apply for the scheme, but they will need to be able to afford the mortgage repayments and will need a reasonably clean credit history: anyone who has a county court judgment against them for more than £500 in the three years before they apply for a loan will be barred. It is not available to people buying second homes.
What type of properties can they buy?
The scheme is available on both new and existing homes costing up to £600,000. Lenders have their own rules about what type of properties they will lend on – for instance, some will not offer loans on homes above shops – and these criteria are likely to still be applied.
As the scheme is not available on second homes, borrowers will be asked to sign a declaration that they do not own another property anywhere in the world. It also is not available on buy-to-let properties, and cannot be used in conjunction with the government's NewBuy scheme.
How will people apply?
It is possible that borrowers will not know that they are applying for a loan through this part of the Help to Buy scheme as the guarantee will be bought by the lender and the deal could happen behind the scenes – lenders might just advertise 95% loans with no mention that they are being backed by the taxpayer. The details are not yet clear. A local independent financial advisor - available through many Hunters branches - should be able to keep you updated and offer advice regarding next steps.
Won't the scheme push up house prices?
The cost of a home has been rising steadily since the chancellor announced Help to Buy. Critics say he is creating a new bubble in thehousing market – a charge the government strongly denies, pointing to lacklustre demand in the regions. However, Osborne appeared to bow to pressure last Friday by giving the Bank of England greater powers to prevent a damaging boom.
So who loses out?
The scheme is bad news for anyone who prudently saved more than a 5% deposit. They may now find they're competing with people with smaller savings who can use Help to Buy to target more expensive properties. Taxpayers could lose out, if many Help to Buy loans turn sour. And there could be wider pain if British house prices do soar and then crash in a few years' time.
For how long is it available?
The scheme has attracted a lot of attention since the government announced that it would be available from October 2013. Despite the early launch, the scheme is set to run until January 2017 as originally planned, however the Bank of England will be monitoring the impact of the scheme closely, and could potentially make changes to the qualifying criteria or withdraw it entirely if they feel it necessary to do so.