MortgagesOct 2 2015

Bank of England confirms Help to Buy poses no risk

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Bank of England confirms Help to Buy poses no risk

The Bank of England’s governor has confirmed to the chancellor that the Help to Buy mortgage guarantee scheme continues to pose no risk to financial stability, with the fee structure remaining the same into next year.

In an exchange of letters between the two, published yesterday (1 October), Mark Carney laid out the conclusions of the Financial Policy Committee’s annual review of the scheme.

The Help to Buy mortgage guarantee scheme, where the government offers lenders the option to purchase a guarantee on mortgage loans which enables them to offer buyers more high loan-to-value mortgages, will be celebrating its second birthday this month.

Mr Carney stated that use of the scheme has been modest in the past year, in line with expectations, with Help to Buy loans accounting for just under 6 per cent of the flow of mortgages for house purchase and Help to Buy lending to date only making up a relatively small proportion of large lenders’ books.

“Furthermore, our estimates suggest lenders are still earning enough income on scheme loans to cover both the scheme fee and potential losses, even under a very severe stress.”

The latest data suggest underwriting standards within the scheme and for high LTV (above 90 per cent) loans more generally remain reasonably prudent, suggesting Help to Buy has not driven any increase in riskier lending, wrote Mr Carney.

“The median loan-to-income for high loan-to-value loan has remained broadly flat since last year, in line with LTIs for the rest of the market. And the share of loans within the scheme with high LTI ratios has been falling since your decision to cap scheme loans at 4.5 times income.”

“Mortgage tenors for loans in the scheme remain slightly above the rest of the market, but in line with comparable loans outside of the scheme,” stated Mr Carney.

“Finally, affordability testing for high LTV borrowers appears to have remained prudent; since the introduction of the scheme around 1 per cent of new loans extended for house purchase with an LTV greater than 90 per cent would have a debt service ratio greater than 40 if rates were to rise to 7 per cent.”

George Osborne responded that he was pleased to see the committee’s conclusions that, under current market conditions, the scheme does not pose material risks to financial stability and has not been a material driver of strong house price growth in some regions.

Last month, the chancellor confirmed the mortgage scheme will end next year, as the economy strengthens and demand wanes.

His comments came as the government reported half of the homes bought through Help to Buy are new-build properties, helping to contribute to the 36 per cent rise in private house building since the launch of Help to Buy in 2013.

The scheme has helped 90,000 households buy their first home - 80 per cent of the overall Help to Buy buyers.

peter.walker@ft.com