Mortgages, the help to buy scheme and what it means!Posted on: 04 October 2013 by Ronan Marrion
Ronan Marrion examines the government's Help to Buy and what it means for you.
The government has just made an announcement that the second phase of the Help to Buy scheme will go live in the coming days rather than the expected launch in January 2014. The scheme 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 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. (1)
What is stage two?
Stage two 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.
So the government will compensate the lender if the property is repossessed and it is unable to recover its entire 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. (1)
How would that work?
If a client 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.
If the lender subsequently 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. (1)
The guarantee will be valid for up to seven years after the mortgage is taken out.
What is the situation if the house 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.
What’s the cost to the lender?
There is still a lot of speculation and varied views surrounding the scheme and this is still the big question. As the price of the guarantee is fundamental to the scheme's success. If the cost is too expensive, there will be no point in lenders using it and 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 LTV's likely to cost the most as they are the riskier deals.
Will the scheme be available from every lender?
Again this is early days and the answer at this point is probably not. Just three have signed up so far – Royal Bank of Scotland, NatWest, and Halifax which have the common thread of being the lenders that have been 'rescued' by the government.
So what’s the 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.
Am I 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.
Are there any limitations to what I can buy?
The scheme is available on both new and existing homes costing up to £600,000. The individual lenders will have their own rules about what type of properties they will lend on and we could expect the lenders to follow their existing criteria into this scheme.
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 New Buy scheme.
How do I apply?
Again because of the early days of this introduction we will still have to wait and see how it will come about but 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.
What will happen to the 'Housing Market' with the introduction of this scheme?
House prices have been rising steadily since the chancellor announced Help to Buy and critics say he is creating a new bubble in the housing market, which is a charge the government strongly denies, pointing to lack lustre demand in some regions. However, Osborne appeared to bow to pressure last Friday by giving the Bank of England greater powers to prevent a damaging boom.
Is this bad news for anyone?
The scheme could be seen as 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 also lose out, if many Help to Buy loans turn sour, plus there is also a big question over the issues raised by house prices soaring and then crashing in a few years' time.
The early release of the second stage of the Loan to Buy scheme has caught most of the lenders by surprise and we can look forward to seeing who is also going to start work with the new scheme. We all have conflicting views on whether this is a good thing or bad but we do expect at least this to be a stimulus allowing both first time buyers to make a move on the property ladder and people who are struggling to raise the bigger deposits to move sooner than they might otherwise have. With the Bank of England taking an over view this should control the market to some extent and ensure there is no ‘boom and bust’.”
Source: (1) Guardian
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