The chancellor’s decision to launch yet more proposals designed to support the housing market has been cautiously welcomed in some quarters but viewed with suspicion by others.
Some see the latest Help to Buy initiatives and other schemes announced in the Budget as steps in the right direction, designed to help first-time buyers (FTBs) onto the housing ladder and enable homeowners to move more easily.
But others see them as a cynical ploy to generate some kind of feel-good factor and win valuable votes in the next election.
Help to Buy, explained in Box 1, is a set of measures designed to encourage lenders to offer more mortgage deals for FTBs and those with little equity in their property. The equity loan scheme is similar to the FirstBuy scheme which launched in the 2011 Budget.
The new scheme offers a loan of up to 20 per cent of the value of a new-build property, repaid only when the property is sold. Borrowers must provide a minimum of a 5 per cent deposit. The loan will be interest free for five years. After that, a fee of 1.75 per cent is payable, rising annually by RPI plus 1 per cent.
The scheme launched on 1 April 2013 and will continue for three years. It is open to all, not just FTBs, provided they are sufficiently creditworthy, and can be used to purchase new-build property worth up to £600,000. As well as propping up the mortgage market, the chancellor also has one eye on helping out the construction industry. But one controversial aspect is that there will be no income cap constraint, so even the very wealthy can take advantage of the scheme.
Government guarantee
Its sister initiative, the Help to Buy mortgage guarantee, is scheduled to begin in January 2014 and will also run for three years. Under this scheme the government will offer a guarantee facility to lenders, backing mortgages of between 80 and 95 per cent loan-to-value (LTV). The aim is to increase the number of high LTV mortgages on the market.
Like the equity loan scheme, this initiative does not restrict the amount of income borrowers are allowed to have, and is available to existing homeowners as well as FTBs on properties worth up to £600,000 (and not just new builds). Mr Osborne estimates that this scheme will provide up to £12bn in government guarantees, supporting £130bn of high LTV mortgages. The guarantee will last for seven years and, in a bid to discourage reckless lending, lenders will be liable for 5 per cent of net losses above the 80 per cent LTV.
However, critics point to a certain hypocrisy in the government’s stance. On the one hand it is encouraging lenders to provide loans at higher LTVs; on the other, lenders are required to hold much larger amounts of capital against higher LTV mortgages because they are higher risk. That also helps explain why there are many more deals available with more attractive rates at 60 per cent LTV or lower. Lenders are reported to be seeking capital relief on higher lending, so they can take advantage of these latest initiatives.
Boom and bust
There is the added concern that if house prices are falling, as some reports suggest, those entering the housing market with the help of high LTV loans may fall into negative equity. Moreover, others argue that stimulating the mortgage market without increasing housing stock could fuel the rise in property prices again, leading to the inevitable boom and bust.
Supporters argue that this is unlikely as the new stricter mortgage rules, especially those on affordability, should help ensure there is no repeat of the reckless lending that characterised the credit crunch. The government has also announced plans to expand its affordable housing guarantee programme and is said to be in talks with the construction industry in a bid to devise schemes that will help increase the supply of housing.
As with all such initiatives, it is too early to speculate about how effective they might be. Most likely it will have some beneficial effect, although it may not be as stimulating to the housing and mortgage markets as the chancellor had hoped. The Funding for Lending scheme already appears to have had some degree of success and Mr Osborne hinted that it might be extended beyond its 2014 cut-off date.
The mortgage market may be limping along but there is certainly no shortage of initiatives.
