The United Kingdom’s (UK) plan to subsidize residential real estate mortgages with taxpayer funds is being rolled out early, according to an announcement from Prime Minister David Cameron. The plan, which will allow many homebuyers to purchase a home with just a 5% down payment, if phase two of the larger Help-to-Buy scheme that has been designed to jumpstart the UK’s housing market. Some experts believe the plan will cause a housing price bubble, but others contend there’s no proof of that and it’s just the shot in the arm the market needs. For more on this continue reading the following article from Property Wire.
The second phase of the UK government’s flag Help to Buy scheme is being brought in three months early and banks will start offering taxpayer subsidized mortgages on properties up to £600,000 from this week.
In a surprise announcement for some, Prime Minister David Cameron announced at the weekend that he was bringing the scheme forward and that state backed lenders, the Royal Bank of Scotland and Lloyds Banking Group, have signed up to the scheme and are ready to go.
Other lenders are expected to follow soon although it is understood that actually money will not be available until January. The details are expected to be made available later this week including fees. It was also announced last week that the scheme will be monitored by the Bank of England on an annual basis.
The announcement comes at a time when property industry commentators have been raising concerns that government intervention in the housing market to boost sales could create a property price bubble but last week the Bank of England said there are no signs of this happening, yet.
This second phase of the scheme extends Help to Buy beyond the new housing market and also allows buyers to get a loan on a home up to £600,000 with just a 5% deposit. It is well acknowledged that first time buyers in particular are struggling to find enough money for a deposit, especially in London and the south east of England where prices are much higher than the rest of the country and rising faster too.
This phase two of the Help to Buy scheme will be available for £12 billion of guarantees on up to £130 billion of mortgages and remain open for three years.
‘Despite the economy recovering, we know many families are finding it tough to get a mortgage deposit together. 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,’ said Ross McEwan, incoming chief executive of RBS.
The bank said it would be offering a range of ‘competitive’ 95% mortgages to first and next time buyers in the UK and that it aimed to help 25,500 first time and next time buyers through the scheme.
Reaction has been mixed. In particular there is concern about prices rising too quickly in some regions as a result and also worries about the effect on the private rental market which has been boosted by the lack of lending to buyers.
According to Camilla Dell, managing Partner of Black Brick, the Help to Buy scheme is good news for first time buyers who, for many years, have been unable to get on the property ladder and have been forced to rent.
But she questions its overall positive effects on a property market that has been steadily improving. ‘The consequences of the government’s intervention into the market in this way may not be for the better. Undoubtedly, the market sub £600,000 is likely to rise and get quite competitive, particularly as the second phase isn't limited to just new build,’ she explained.
‘The knock on effect is also likely to cause changes in the lower end of the rental market. Help to Buy will take hundreds of tenants out of the market and could cause rents for properties valued up to £600,000 to fall. In central London, this is likely to be seen on one bed and studio flats.
‘So, wwhether it will be for the best remains to be seen overall, I'm not sure it will be. The problem with Help to Buy is it’s a bit like credit cards as people take on debt they can't afford, which is dangerous. In my opinion, the government should really be addressing why housing is so expensive in the first place, rather than finding a way to fund it. We need to build more homes so that supply eventually meets with demand, and that's where government’s focus should lie,’ she added.
Property expert Henry Pryor is not convinced, saying that the first phase of Help to Buy made sense for people looking to buy a new build home. He pointed out that in general this second phase, which was due to be launched in January 2014, was felt to be flawed and risked bucking the market and critics have included past and current Governors of the Bank of England, the treasury Select Committee, the International Monetary Fund, lenders, builders, all the main opposition parties and even the Business Secretary Vince Cable.
‘Everyone felt that this was a step to far and risked creating a price bubble. What's odd is to try to solve a supply problem by subsidizing demand. Give 10 people trying to buy six houses more money and guess what they do with it? Ironically the Tory party aim of helping those who can't afford to get into the housing ladder will result in making those very homes they want to buy more expensive. It's nuts,’ he said.
However, others are more positive about bringing the scheme forward. ‘Allowing buyers of second hand homes earlier access to Help to Buy will stop the autumn market stultifying while everybody waits for the New Year. It will therefore assist in avoiding the artificially pent up demand from the autumn overflowing into January,’ said Jonathan Hopper, managing director of property finders.
‘It is good news that the government owned banks have agreed to take part in the scheme so quickly, however we urge the other mortgage lenders to get on board quickly and offer the scheme to their borrowers,’ he added.
Brendan Cox, managing director of Waterfords estate agent, believes that it is possible that the move could fuel a housing boom as people who were previously unable to buy will be unleashed to the housing market and this is bound to send a ripple effect up the chain.
But he also pointed out that the Bank of England and the government have said they are going to keep a very close eye on this to make sure a boom doesn't happen although they haven't actually said what measures they intend to put in place to prevent it.
Stock levels remain low and this new dimension will surely only further increase prices as the supply and demand factor pushes prices upwards,’ he said, adding that it is also going to have an effect on the rental market.
‘We could see a leveling out of rental prices as tenants take this opportunity to buy their first home but we mustn't forget even raising 5% will be beyond a lot of tenants reach,’ he added.
‘Cutting the wait short for 95% government backed mortgages will clearly give renewed hope to frustrated would be home owners across the country, according to Peter Williams, Executive Director of the Intermediary Mortgage Lenders Association (IMLA).
‘The equity loan aspect of Help to Buy has been a resounding success and there is no doubt that the appetite exists for the new mortgage guarantee to fly off the shelves. That said, higher loan to value (LTV) mortgages have already become more readily available as funding has improved and competition intensified. In that respect the government needed to get the scheme out earlier to have any real impact. The first time buyer market in the UK has been driven off 95% LTV loans for many years so fully restoring that market will be helpful and should boost transactions,’ he explained.
‘The announcement’s timing during conference season does make Help to Buy’s political purpose even more explicit in terms of boosting party morale and electoral prospects. While the Bank of England is preaching caution and careful monitoring of house price inflation, bringing the mortgage guarantee forward by three months opens the government up to accusations of pushing too far, too fast. But with central controls in place to deal with any downsides of the scheme, it should still be possible to manage this intervention successfully,’ he pointed out.
‘Clearly the state supported lenders are the first to open for business and accept applications for the scheme. But with final terms and conditions still to emerge, not to mention costs, most lenders will need time to reflect before deciding what their offer will be. It is vital we guard against the assumption that all lenders will be able to accept Help to Buy applications from day one, which may result in even greater frustration from staff and customers across the country.
‘It is also likely that we will see interventions in the scheme over its planned three year lifespan, so lenders and borrowers also face the uncertainty of regular changes in terms and conditions. IMLA members’ concerns about Help to Buy’s possible effects on house prices have been partly eased by the revised controls regime, but considerable uncertainties remain: not least because the housing market is now firmly in the party political headlights,’ he added.
It will cause ‘a wave of excitement’, according to Brian Murphy, head of lending at the Mortgage Advice Bureau. ‘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 home owners 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,’ he said.
‘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,’ explained Murphy.
‘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,’ he added.
Ben Thompson, managing director of the Legal & General Mortgage Club, reckons that the government didn’t want to leave it too late, but added that remains unclear exactly what the scheme details and specifics are for lenders, and in that regard precisely who will participate other than RBS and Lloyds Banking Group.
‘It is clear that there are potential first time buyers and movers who are having to spend significant time saving for a substantial deposit and this has to be fixed in order that families can live in suitable accommodation and enjoy home ownership in the same way that previous generations have. Bringing the scheme forward potentially enables some to buy or move a few months earlier than originally planned, in some regions saving a little more money, as house prices in some parts are climbing. It's therefore important not to leave this too late,’ he added.
This article was republished with permission from Property Wire.