The chancellor’s latest plan to boost home ownership could have a substantial impact on the property market – both now and when it comes in to effect in 2014. And the effect could be larger in Scotland than elsewhere in the UK.
Implemented correctly (and it is not certain that it will be – see below), ‘Help to Buy’ will do just what it says; put buying within the reach of thousands of would-be home owners who don’t have a large enough deposit to get a mortgage but who could easily afford the monthly mortgage payments.
That could mean a significant change in the market. The biggest group of potential beneficiaries are those who are currently renting and who might now have the chance to buy without the need for a large deposit. So called ‘second steppers’, who don’t have enough equity in their current home for a deposit on a larger home, could also find their chances of moving up the ladder are greatly improved.
Mortgage insurance guarantee
The Mortgage Insurance Guarantee scheme will be the equivalent of the government putting up a 15 per cent deposit on a mortgage for any property, new or established, (up to £600,000) provided that the buyer also contributes five per cent.
That effectively creates a 20 per cent deposit which would allow the buyer to qualify for a mortgage – provided the lender is satisfied that he or she can afford the repayments.
The government is not actually putting up any money, it is merely saying to the lender that it will cover losses up to 15 per cent of the loan in the event of default if the loss is greater than the buyer’s five per cent deposit.
The government says that it will provide sufficient guarantees for up to £130 billion worth of mortgage lending. That’s about 10 per cent of total outstanding mortgage lending and pretty much the total gross mortgage lending for a year at the current low rates of activity.
There are at least three things that might hobble the scheme, but assuming they are avoided, the impact on the property market could be significant in two ways.
Firstly, it should boost transactions. Overall, it could increase the number of buyers in the market by around 10 per cent. And transactions are likely to grow by a lot more than that since most sellers go on buy another property which, in turn, results in another sale and so on. We can see that a significant number of purchases are stalled because the aspiring buyer can’t sell their current home and if Help to Buy unblocks that log jam, there could be a sharp rise in activity.
Secondly, it could reduce demand for rented property to some extent. A lot of the new buyers are likely to be people currently renting. For many tenants, rent is higher than the equivalent mortgage payments, so many should be able to afford a mortgage if they could get one. This is particularly true of Scotland where the mortgage costs are lower compared to rent than in most other parts of the UK.
Thirdly, buyers with the necessary deposit could well decide to buy before the scheme comes in to effect at the start of 2014, rather than wait until there are more buyers in the market. That could mean that the scheme has an effect on the market even before it is available.
What could go wrong?
Help to buy won’t work, or will work less effectively if:
1. Funding for Lending is not renewed. This is due to end next year, just at the point at which Help to buy comes in to effect, but there has been much talk of extending and even expanding it. If it is allowed to expire, it will limit the amount lenders have to lend.
2. Capital allowances are not reduced.
Mortgage lenders are required to hold more capital (against a possible loss) when they lend at high loan to value ratios. In fact, they need to have eight times more money to provide a 90 per cent mortgage than they do for a 60 per cent mortgage. From their point of view, it makes no sense to lend one person a mortgage at a high loan to value when they could lend money to eight buyers with a better deposit.
If the rules mean that they have to treat mortgages with a government guarantee under Help to buy as if they were 95 per cent rather than 80 per cent mortgages, the banks and building societies simply won’t have the funds to lend.
The scheme needs to apply to purchases only. If existing owners can use it to re-mortgage, possibly to a better rate, then it will have no impact on transactions.