MortgagesMar 27 2014

Jury still out on Help to Buy

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Presented by the prime minister as the way to get younger people onto the property ladder, some lauded the scheme for reinvigorating the housing market and enabling reliable rent-payers to purchase their own homes, while others warned it represented a return to irresponsible lending.

Phase one of the scheme, unveiled in April 2013, was designed to help first-time buyers with the purchase of a new-build property.

It was followed by phase two, which extended 95 per cent LTV government-funded mortgages to all borrowers and to include old and new-build homes valued at less than £600,000.

Despite pressure from some quarters to cancel it before 2016, George Osborne, the chancellor of the exchequer, extended the equity loan scheme to 2020 in the Budget to “bolster the UK construction industry” and await the completion of “120,000 new homes” being built as a result of the policy.

Propositions

At this early stage, all eyes have been on the providers to see who has signed up and what deals have been made available. Some lenders have so far refused to offer mortgages under the Help to Buy scheme and have instead independently launched 95 per cent LTV products. But the new year brought news of several big and smaller names revealing their new government-backed propositions.

To date, the likes of Halifax, Bank of Scotland, RBS, NatWest, HSBC, Aldermore, Virgin Money, Lloyds Bank, Santander, Woolwich Building Society and Barclays have already signed up, with others like One Savings Bank and the Post Office announcing plans to launch products linked to the scheme.

Ray Boulger of John Charcol, the independent mortgage adviser firm, said that, currently, the deal that most stood out was Santander’s. Although its Help to Buy products offer similar rates to its rivals, what struck him most were the free valuations and cashback options.

He said: “Santander’s rates are definitely going to leave it in the frame. Anyone who needs 95 per cent LTV does not have a lot saved up, so if the other costs are mitigated that will really make a difference. The arrangement fee is a very important factor here. For a lot of borrowers, the ideal scenario is a competitive rate and lower upfront fees.”

Another deal that stood out for Mr Boulger was HSBC’s Help to Buy proposition, which he said was typical of an emerging trend from some providers to apply restrictive conditions. Despite being impressed with the bank’s interest rates, he added that it only offered deals over 25 years and on houses valued between just £200,000 and £400,000, both of which made the deal less compelling. As a result, he warned advisers and clients to be aware of lenders using the policy’s brand while applying different terms. Furthermore, despite being positive about Help to Buy and optimistic that rates will improve as more lenders enter the market, he also warned that the government’s targeted demographic could be knocked back due to a “flawed” credit scoring system.

He said: “The issue with all the major lenders is that they credit score and first-time buyers are traditionally discriminated against with credit scoring. The higher the LTV, the higher the credit score that is demanded, which means every lender that credit scores will not be as accommodating. This is one of the benefits of the smaller providers, and brokers need to take these things into account. Some, like the building societies and Aldermore, use manual underwriting and this could prove to be a benefit, as they can look at the full picture.”

Others in the industry, meanwhile, have adopted a different stance.

Daniel Bailey, owner of Derbyshire-based Middleton Finance, preferred to wait a few months for product number increases to stimulate more competitive rates.

In addition, he said he has not paid much attention to Help to Buy yet, because there have not been many queries, although he believed that the introduction of the second part of the scheme could help to rally more interest, particularly as it included the option to buy older properties.

He added: “A lot of brokers I have spoken to will have not seen a massive influx of Help to Buy queries. What I have always said to clients is: ‘Look at all the options available. Help to Buy may not necessarily be for you, because the deals out there are getting more competitive.’”

Knowledge

Besides some lenders offering 95 per cent LTV outside of the Help to Buy scheme, another factor that could restrict its success at these early stages is a lack of understanding. Even though the policy has been in the spotlight, Mr Bailey claimed that the exact details of how it worked was still a mystery to many.

He said: “People do not fully understand it. It has helped stimulate interest in the market in general, but not necessarily for Help to Buy, which is still in the early stages. The consumer needs to be more informed. People don’t know how it works.”

This view was reinforced by a recent Mortgage Advice Bureau survey that revealed how the government’s efforts could be wasted by a lack of consumer awareness. It gauged the opinion of 1,161 UK adults, of whom 38 per cent knew nothing about the scheme, while 17 per cent believed it was for first-time buyers. Brian Murphy, head of lending at the Mortgage Advice Bureau, concluded that not making consumers fully aware of its ins and outs could damage the prospects of millions of aspiring homebuyers.

He said: “While consumer demand for mortgages is high and plenty are keen for financial assistance, many are in danger of missing out and are being let down by a lack of knowledge of the available options. Common misconceptions, such as the belief that Help to Buy is only for first-time buyers, could hold others back from securing a mortgage to move house and free up more properties for those looking to join the ladder.”

Despite debate over potential flaws of Help to Buy, it would be premature to write it off when providers are still finalising their advertised products. Most commentators have predicted that more lenders, either through Help to Buy or independent of government finance, will enter the 95 per cent LTV market to stay competitive. That should bring with it better rates and, eventually, greater awareness.

Daniel Liberto is feature writer at Financial Advisor

Key points

- The Help to Buy scheme has divided opinion between all parties involved in the mortgage market.

- All eyes have been on the providers to see who has signed up and the deals available.

- A lack of awareness could potentially restrict its success.