Developers and mortgage lenders in Scotland are expected to launch a low-deposit mechanism for those buying a new home very soon. But what effect will ‘MI New Home’ have on the market?
MI New Home will make it possible for some to buy a new build property in Scotland with just a five per cent deposit. In other words, buyers will be able to get a 95 per cent mortgage on a new home – provided that they can prove to the lender than they can afford it.
It’s the Scottish version of NewBuy which went live recently and I think it’s worth pointing out that a lot of the work that made NewBuy possible was actually started in Scotland.
The aim of the scheme is to reduce the risk to lenders and so make it easier for them to lend to those without a large deposit. The developer puts aside part of the purchase price to be held by the lending bank for seven years. And the Government provides a guarantee that it will cover part of the purchase price in the event that the buyer defaults on the mortgage and the house sells for less than its purchase price.
In the NewBuy scheme, the developer contributes 3.5 per cent of the sale price and the government guarantees a further 5.5 per cent. It is likely that the arrangements will be similar in Scotland.
The launch of the NewBuy scheme attracted a lot of comment, much of it to the effect that it would distort the property market, pushing prices higher and tempting unfortunate buyers in to acquiring homes they can’t afford.
Let’s get the scheme in context. Homes for Scotland reckons that the scheme, at full capacity, will generate an additional 6,000 sales in a year. With around 70,000 property sales expected in Scotland this year (and more next as market activity recovers), that is a significant, but not a huge figure.
And, while MI New Home is expected to go live soon, it relies on individual arangements between lenders and builders. Each lender and builder will have to agree who they want to work with and to which properties the deal applies. That is likely to take time and so the volume of properties to which MI New Homes applies will only build gradually.
Moreover, the scheme is only available to those buying a brand new home. Anyone who wants to buy an established property will be unaffected.
If MI New Home means that buyers who would have bought an established property decide to buy a new home, there will be no effect on overall demand for property and so no effect on prices. Even if it increases the number of buyers in the market, it should also increase supply to the same extent because the developer will build to meet demand. Again, there will be no discernable effect on prices.
What of the claim that it will saddle buyers with unaffordable debts? There’s no suggestion that the lending criteria designed to check that the borrower can repay the loan have been loosened. Quite the reverse, lenders are now taking more care than ever to ensure that borrowers are financially secure. That could mean, of course, that some buyers might not qualify for the scheme even if they have a five per cent deposit and find a house they want where the scheme applies. But those who do qualify should be able to afford the repayments over the medium term.
So, what’s the point of the scheme? To get builders building. The number of new home starts has been exceptionally low since the start of the recession. That means a reduction in supply (depite longer term predictions of an increase in demand for housing) and, crucially, a significant fall in jobs.
MI New Home is principally designed to put the builders back to work, securing existing jobs and creating new ones. If it happens to help some people to buy a home at the same time, so much the better.