Help to Buy may have to end early, warn mortgage brokers, as fears grow over cheap money fuelling house price inflation
03-13-2014
By Marc Shoffman
Thousands of buyers have been getting onto the property ladder thanks to the government Help to Buy schemes, but could its success lead to its downfall?
The Help to Buy equity loan, launched last April, and the guarantee scheme, unveiled in October, have helped more than 20,000 borrowers access low deposit mortgages.
But brokers and lenders are warning that rising house prices, mortgage pricing, and decent deals outside of Help to Buy, could see the popular guarantee scheme withdrawn early. The biggest threat to the scheme is artificially inflated prices, according to 69 per cent of lenders and 57 per cent of brokers, surveyed by the Intermediary Mortgage Lenders Association.
Sold: Help to Buy has enabled more than 20,000 borrowers to secure a low deposit mortgage
Both the equity loan and guarantee schemes allow borrowers to access a mortgage with a deposit as low as 5 per cent.
The equity loan scheme, available only on new-builds, also includes a loan from the government of up to 20 per cent of the property price, which is interest-free for the first five years but then starts to accrue charges starting at 1.75 per cent.
This has attracted more than 14,000 borrowers and is set to end in March 2016.
The second scheme provides a guarantee to the lender of up to 15 per cent of a mortgage in return for a fee from the financial institution, and the borrower then has to provide a 5 per cent deposit.
This has helped more than 6,000 borrowers and is set to last for three years.
But while these housing market boosters have helped people get on the property ladder, brokers from the Intermediary Mortgage Lenders Association are warning that rising house prices and increasingly expensive mortgages could mean changes need to be made sooner than expected.
The trade body’s latest Intermediary Lending Outlook reveals a consensus that the second Help to Buy scheme has been the most critical factor in boosting access to 95 per cent loan-to-value mortgages.
More than three quarters of brokers,78 per cent, and 77 per cent of lenders see this part of the government scheme as a major driver in improving conditions for borrowers with low deposits.
Significant numbers also credit Help to Buy with a key role in boosting the appeal of new build homes through its equity loan offering.
So what are their concerns?
Housing inflation
Over-inflated house prices is the number one threat to the success of Help to Buy according to brokers and lenders in the IMLA survey.
House prices in February rose at their strongest rate since May 2010 and are now just 3 per cent below their 2007 record high, according to Nationwide’s house price index.
The main criticism of the Help to Buy scheme is that it could create a housing bubble that pushes prices up and locks future generations out of the housing market.
Supporters of Help to Buy will point to stats that most house price growth is in London and the South East, while lending under Help to Buy has been outside these areas, with the most popular areas in Leeds and Bedfordshire.
Pricing
The Help to Buy schemes are giving lenders government backing to provide mortgages at low deposit levels.
Yet while the government is providing a 20 per cent portion for the equity loan scheme, or a 15 per cent guarantee for the second scheme, borrowers are not really seeing the benefits of what is really either a 25 per cent or 20 per cent mortgage when you include their deposit.
TOP 10% DEPOSIT MORTGAGES
Lender Fixed Rate
1 Skipton BS Two-year 3.99%
2 West Brom Two-year 3.49%
3 HSBC Two-year 3.59%
4 Chelsea Two-year 3.49%
5 Post Office Five-year 4.29%
What's next for mortgage rates?
Half of brokers surveyed by IMLA described many of the Help to Buy guarantee products as uncompetitive compared with the rest of the market, which could reduce reliance on the scheme.
The lowest rate for a Help to Buy equity loan mortgages is Leeds Building Society’s two-year fixed rate mortgage at 2.5 per cent with a £199 fee.
That is before you have to repay the equity loan.
But an actual 25 per cent deposit mortgage is priced lower, for example, West Brom has a two-year fix at 1.89 per cent for a 25 per cent deposit and a fee of £999.
The lowest rate for a Help to Buy guarantee scheme loan is 4.79 per cent with a £99 fee from HSBC
Using the This is Money rate and fees calculator, a 25-year £150,000 mortgage on the 4.79 per cent rate would cost £858 a month and £20.706.14 over two years.
The same mortgage with the 4.99 per cent rate would be £876 a month and £52,659.68 over five years.
RBS and Natwest have a rate of 4.99 per cent with no fee under Help to Buy, but then you are left with rates above 5 per cent from other participating lenders.
But there are competitive deals outside of the scheme.
Norwich and Peterborough Building Society has a two-year fixed rate at 4.99 per cent with no fee for first-time buyers. The fee is £845 if you wanted to remortgage.
The £150,000 25-year mortgage would cost £876.01 a month and £21,024.27 over two years for a first-time buyer.
If you were looking for a five-year fixed rate with a small deposit, Furness Building Society has a fee-free five-year fixed rate at 4.75 per cent with no fee but it is only available in branches across the North West.
Your monthly repayments on the same mortgage would be £855.18 and the over will cost over five years would be £51,310.56.
Should Help to Buy be scrapped early?
Low deposit mortgages have always been part of a healthy mortgage market so now that lenders have started introducing rates independent of the government and transactions have been given a shot in the arm, is there any need for the government to keep intervening?
Half of brokers surveyed, and 46 per cent of lenders, predicted the guarantee scheme portion would end early, particularly for remortgages, as Aldermore and Virgin Money allow.
Allowing people to remortgage using Help to Buy doesn’t really help move the market, as these schemes are meant to do.
The Help to Buy equity loan scheme for new build homes is judged to have the biggest chance of being extended beyond its current end date of March 2016.
Almost one in four lenders, 23 per cent and one in five brokers, 18 per cent expect to see this part of the scheme prolonged.
This part of the scheme helps more industries as it helps buyers as well as builders and developers who are compelled to construct more properties.