Help to Buy: London housing bubble fears grow
02-04-2014
Everything you need to know about Help to Buy, mortgage rates and fears about a London house-price bubble
THE soaring cost of homes in London are inflating a house-price bubble, according to an influential group of economists, but ending the government's Help to Buy scheme would do little to alleviate the risks.
Critics have said the scheme, which gives government backing to 95 per cent mortgages on homes worth upto £600,000, is fuelling runaway house prices in London.
But a report by the EY Item Club said that Help to Buy was unlikely to contribute to the "bubble-like conditions" developing in London.
Andrew Goodwin, the group's senior economic adviser, told The Financial Times that Help to Buy was a red herring. "The scheme has only a very limited impact on the capital," he told the paper. He also warned that "withdrawing it could risk choking off the recovery in housing transactions across the rest of the UK, without solving any of London’s issues.”
Help to Buy Q&A: How it works and who qualifies
What is Help to Buy?
Help to Buy has two phases, both of which are aimed at buyers with only a 5 per cent deposit. The first, a £3.5bn scheme for buyers of newly-built properties worth up to £600,000, was introduced in April last year and has already been taken up by about 7,000 people. The second phase, which covers new and second-hand homes, started accepting applications last October.
How does phase one of Help to Buy work?
The first phase of Help to Buy applies only to new homes and first-time buyers. Borrowers need to raise a 5 per cent deposit on the property and can then borrow a further 20 per cent from the government, initially interest free, up to a maximum of £120,000. After five years, what remains of the loan will attract interest at 1.75 per cent per year. The rate will increasing each year by 1 per cent above inflation. The £3.5bn scheme, which will be administered by home builders will support about 74,000 home purchases.
What happens if you can't pay your mortgage?
If you take out an equity loan and find you can't pay your mortgage, you'll probably have to sell the property or the bank will repossess it and sell it for you. Citywire warns prospective borrowers that the 20 per cent equity loan will still need to be paid back to the government.
And phase two?
Phase two of Help to Buy applies to home movers as well as first-time buyers and second-hand houses as well as new ones. In this phase, the government does not loan money to the homebuyer but provides a guarantee to the lender for up to 15 per cent of the loan. That will allow borrowers with only a 5 per cent deposits a much wider choice of mortgage deals. As in phase one, there is a limit of £600,000 on the value of the property.
Why do lenders need loan guarantees?
The government guarantee reduces the bank's losses if a borrower defaults on his or her payments. "That allows them to offer cheaper mortgages to would-be home-buyers with small deposits, who are currently locked out of the market," explains the Daily Telegraph.
How much can you borrow?
In theory, up to £570,000, but the Telegraph notes that “lenders will apply a strict cap on income multiples (a likely maximum of five times earnings, single or joint) as well as tough limits relating to the amount of income borrowers have spare at the end of the month”. That’s likely to mean that mortgage payments may not exceed 55 per cent of borrowers’ post-tax income. “Those who qualify for the loans will, in the most part, need to have good jobs and earn substantial incomes. And the mortgages offered them may be far smaller than they expected or hoped,” the Telegraph concludes.
What mortgage rates are available under Help to Buy?
All the figures below apply to 95 per cent loan-to-value mortgages. In some cases, cheaper deals are available under Help to Buy for 90 per cent loans.
•HSBC: 2-year fixed; 4.79 per cent; £99 fee
•Nat West: 2-year fixed; 4.99 per cent; no fee
•RBS: 2-year fixed; 4.99 per cent; no fee
•Santander: 2-year tracker; 4.59 per cent above base rate (currently 0.5 per cent); no fee
•Santander: 2-year fixed; 4.99 per cent; no fee
•Halifax: 2-year fixed; 5.19 per cent; £995 fee; must have Lloyds current account
•Halifax: 2-year fixed; 5.79 per cent; no fee; (5.59 per cent with Lloyds current account)
•Virgin Money: 2-year fixed; 5.29 per cent; no fee
•Virgin Money: 5-year fixed; 5.49 per cent; no fee
Are there better offers available outside Help to Buy?
Possibly. The Cambridge Building Society recently announced a deal that undercuts the government-supported scheme. It’s discount mortgage, available to first-time buyers with a 5 per cent deposit, charges 3.99 per cent interest for the first year, then steps up to 4.89 per cent for the following two years. Norwich & Peterborough also has a 95 per cent mortgage at 4.89 per cent for two years, with a free valuation and £500 cashback.
Are there an unlimited number of 95 per cent loans on offer?
No. The government is making £12bn available in loan guarantees, enough to fund mortgages worth a total of £130bn. The scheme will remain open for three years. Mortgage brokers fear "a stampede of new applications" for loans when the scheme opens, reports The Guardian.
Who is excluded from Help to Buy?
The new loans aren't means tested, but they won't be available to people wanting to buy second homes or buy-to-let properties. Prospective borrowers will be required to sign documents confirming they are first home buyers or, if they already own a home, that they are in the process of selling it.
What do supporters of the scheme say?
The incoming chief executive of the state-backed RBS, Ross McEwan, told The Guardian that his bank was backing the scheme because: "We are committed to helping as many people as possible across Britain to get on with their lives, to buy their first home, to move to a bigger house as their family grows."
What do critics say?
Business Secretary Vince Cable says the scheme may trigger an unsustainable boom in house prices, particularly in the south-east of England. Before Christmas, he said that a "raging housing boom" had taken hold in London and the South East and that Help to Buy should now be reconsidered