Now or never?
02-25-2014
The government wants more people to get into property, but there are more options out there than Help to Buy for FTBs. Bethany Rutter reports.
By Bethany Rutter
At a time when an increasing number of people are struggling to get onto the housing ladder and home ownership is sounding like a distant dream, first time buyers (FTBs) are being given a helping hand by the government. Despite talk of a housing bubble, various schemes are aiming to help FTBs who are unlikely to be able to save a big enough deposit to own their first home.
The number of loans taken out by, and value of loans sold to FTBs, (shown in Chart 1 and Chart 2 respectively) are, however, on the up. Estate agent Haart claims that registration for FTBs was up 82.1 per cent in December 2013 on 2012 figures thanks to a huge increase in demand from Help to Buy schemes. This is backed by figures from the Council of Mortgage Lenders (CML), which showed FTB lending in the third quarter of 2013 was up 32 per cent year-on-year in London - traditionally a hotspot for FTBs being excluded from home ownership due to expense.
Data from LSL Property Services, the parent company of E.Surv Chartered Surveyors, Your Move and Reeds Rains estate agents, showed the average FTB in London and southeast England is 32 and has a salary of £41,616. The rest of the country has an average age of 30 and a much lower salary of £31,731. The average income of first time borrowers according to CML data is shown in Table 1, while interest payments as a percentage of income is shown in Table 2. Since the average nationwide salary is around £26,500 and four in five new jobs are in sectors that have an average pay of less than £16,640 for a 40-hour week, access to home ownership seems unattainable.
Government help
There are four types of government-backed home ownership schemes offered in England at present, while Wales, Scotland and Northern Ireland each have their own schemes.
With Help to Buy equity loans, FTBs and home movers alike are offered the opportunity to move to new-build homes with a purchase price of up to £600,000 if they can raise a 5 per cent deposit. With the equity loan scheme, it is not permitted to sublet the property, and it must be the buyer’s only property. The buyer must contribute a deposit of at least
5 per cent while the government offers loans of up to 20 per cent of the full value, meaning the buyer must take out a mortgage of up to 75 per cent. With these loans, the buyer must purchase the home from a company that is a registered Help to Buy builder. Interest does not apply for the first five years of owning the home, but in the sixth year mortgage-holders will be charged a fee of 1.75 per cent of the loan’s value, increased every year in line with the retail prices index plus 1 per cent.
Launched three months ahead of schedule to meet demand, the Help to Buy mortgage guarantee applies to FTBs and home owners on new-build and older homes with a value of up to £600,000. It is a liability fund of £12bn offered by the government that can guarantee up to 15 per cent of a mortgage. The guarantee is provided by the government to mortgage lenders and not to the buyer, but still means lenders are able to offer high loan-to-value mortgages with 15 per cent being guaranteed.
Several big providers offer mortgages available with a 5 per cent deposit to work alongside the mortgage guarantee scheme. HSBC offers a five-year fixed rate mortgage at 4.99 per cent while NatWest offers 5.49 per cent.
There is also the possibility of shared ownership schemes which are provided through housing associations. These properties are always leasehold and involve buying a 25 to 75 per cent share of the home while paying rent on the rest. FTBs are eligible for shared ownership, and these may be particularly useful to them since the household must earn less than £60,000 in order to qualify. CML spokesperson Bernard Clarke says that lenders are often less willing to engage with these schemes. “They like programmes they can engage with on a large scale and which don’t have different rules according to which shared ownership scheme the buyer is taking advantage of,” he says. “The problem with shared ownership is the multiplicity and complexity of schemes, whereas one of the great advantages of Help to Buy is that it applies across the whole of a country in the same way whereas often shared ownership schemes are locally driven.”
The NewBuy scheme requires only a 5 per cent deposit and applies to newly built homes priced at £500,000 or less, built by a builder taking part in the scheme.
The future for Help to Buy
David Baker, head of mortgages at Lift Financial is wary of schemes such as Help to Buy. He has had a lot of enquiries about the scheme from clients, but says very few take it up since the rates available to borrowers are so uncompetitive. “In reality they can be correct in the right circumstances, but if you can avoid using government schemes you probably should,” he says. “I also really don’t like shared ownership because it is hard for people to staircase up and buy it outright. It is like a form of posh renting, really.” He adds that among his colleagues, market confidence is strong at the moment, and that property prices are visibly rising in London and the southeast.
On top of this, results of a survey released by Rightmove in December 2013 show that 34 per cent of hopeful FTBs say they do not fully understand how the Help to Buy mortgage guarantee works. Even among those who thought they understood the scheme, 23 per cent incorrectly thought it could only be used on new-build properties. The combination of the lack of public knowledge on how the scheme functions and the lack of truly appealing mortgage rates means it may not be top of FTBs’ lists when it comes to making the decision.
Mr Clarke also contests whether Help to Buy is encouraging a housing bubble. “There are those who say the schemes are having an effect on the housing market, but the Council of Mortgage Lending (CML) and many others think we are a long, long way from any housing market boom, and clearly the Bank of England will continue to monitor the effect it is having on the market.” He argues that it is broadly achieving what the government set out to do: helping those who are constrained by the need for a large deposit, but who can afford monthly mortgage repayments.
What else is out there?
In terms of other options for FTBs, it is largely true that the only way to overcome a lack of deposit is to rely on wealthy parents or grandparents to help out. Several non-government-backed products rely entirely on a deposit or guarantee being provided by relatives with the means to provide for the buyer. Where this is not possible, options are few.
Guarantor mortgages could be an option for those with parents who are willing and able to help. Traditionally, they existed to help those who did not have quite enough to meet monthly repayments, but now the bigger problem is almost always the lack of a big enough deposit. Guarantor mortgages pass the liability for part or all of the loan on to a third party, meaning they partially underwrite the debt. These do not solve the problem of a lack of deposit, but mean the borrower can often access a better mortgage rate. If the original borrower cannot meet repayments, the guarantor becomes contractually obliged to take responsibility. These kinds of mortgages are very often non-transferrable so must be taken out on a property the buyer plans to stay in for a long time.
Woolwich Building Society offers its Springboard product as an alternative, which gets parents involved in the property purchase. Family Springboard mortgages allow parents to help their child purchase a home, and return the money to them with a small amount of interest. The mortgage arrangement comes in two parts, with one being the loan and the other being a savings account, into which they put 10 per cent of the house price. This allows Woolwich to offer a 95 per cent mortgage with the buyer requiring only 5 per cent as a deposit. If the borrower has kept up mortgage repayments after three years, the Helpful Start account is closed and the money is returned to the parents. Lloyds Banking Group’s Lend a Hand mortgage runs along similar lines, except the buyer must put up a 5 per cent deposit against a family member providing 20 per cent of the property value, who will earn interest at 2.7 per cent.
At present, just three providers are in the rare position of offering 100 per cent mortgages, but only through schemes that involve parental assistance or guarantees. Aldermore, Vernon and Bath Building Society offer mortgages with no deposit, but with rates in excess of 5 per cent, it is not a competitive space. Aldermore offers them on two- and three-year fixed rate products, and secures the loan against the guarantor’s residential property which means no cash is required in the form of a gifted deposit. Its fixed rate stands at 5.48 per cent, while Bath offers three years fixed at 5.29 per cent in a similar scheme available only to FTBs.
Options that do not involve help from either the government or a wealthy relative are few. One involves taking out a 95 per cent loan-to-value (LTV) mortgage which is not backed by Help to Buy. These are not widely available, and not available at all from the big lenders who are involved in the government schemes, but can often be taken out by their existing customers. Mostly available through regional building societies, these have a tendency to enter and leave the market at different times. Furness Building Society, Newcastle Building Society and Clydesdale Bank are currently among the providers offering 95 per cent mortgages unattached to Help to Buy. One of the main benefits of this is that the scheme restricts buyers to residential purchases only, but if in the future it becomes necessary to rent out the property rather than sell it in order to move into a new home, that contravenes the rules of the scheme. The 95 per cent mortgages only needs a small deposit while retaining greater flexibility than Help to Buy mortgage guarantee allows.
The rates, however, could be off-putting. Newcastle offers 5.49 per cent fixed rate on loans up to £350,000, which is similar to those offered by lenders operating alongside Help to Buy. Furness’ rates are fixed for five years at 4.75 per cent, going up to 5.44 per cent after that period. Clydesdale Bank also offers 95 per cent mortgages to FTBs only, with a three-year fixed rate loan at 4.99 per cent. One of the disadvantages of mortgages sold through Clydesdale is that their applications are paper-based which can slow the process down.
No ideal solution
According to recent data from the CML, the average LTV on mortgages for people moving home is 70 per cent, while the average for FTBs is a surprisingly low 80 per cent. These figures show that across the board, it is still largely necessary to gather a large deposit before buying, and whether or not Help to Buy will start to make a dent in this remains to be seen.
The available options for FTBs who cannot afford the deposit required for a traditional mortgage are limited to either receiving help from a family member or taking advantage of government schemes. For those without family able to help, and who want to avoid the restrictions that come with government-backed initiatives, trying to get a 95 per cent mortgage means accepting very high rates.
Looking at rates available for those who can reach the 20 per cent deposit that would allow a buyer to meet the average LTV shows the difference between what is marketed at those FTBs with small deposits and those able to take out a regular mortgage. On an 80 per cent mortgage, the Post Office, for example, offers two years fixed at 2.38 per cent, but which goes up to 4.49 per cent after that period.
This speaks to the difficult decision between buying anything a client can afford in a healthy market and accepting high rates - but owning property - or waiting until they can afford a large enough deposit to make the repayments more reasonable, while hoping house prices do not rise faster than they can save.