Financial Conduct Authority  

FCA warns on Help to Buy risk

FCA warns on Help to Buy risk

The City-watchdog has flagged concerns over the risk of negative equity for borrowers who use the government’s Help to Buy scheme.

The Help to Buy scheme had helped more than 200,000 consumers jump on the housing ladder by the end of 2018 and is set to continue for all borrowers until 2021 and for first-time buyers until 2023.

But in its 86-page Sector View, published this week (February 18), the Financial Conduct Authority warned the scheme made borrowers more exposed to any change in economic conditions.

The financial regulator said: “A stagnant housing market, combined with the ‘new build premium’, could see a reduced number of re-mortgage options relative to a non-Help to Buy property. 

“They are also more likely to face negative equity if property prices begin to fall.”

Through the government’s Help to Buy equity loan buyers can borrow 20 per cent of the cost of a new build property — 40 per cent in London — from the government with no loan fees for the first five years of owning the home.

This means buyers only need a 5 per cent cash deposit and a 75 per cent (55 per cent in the capital) mortgage to make up the rest.

But new-builds can fall substantially in value once the buyer has moved in, meaning the consumer is immediately more at risk of negative equity.

On top of this as the government boosts the loan-to-value in order to give borrowers the chance to buy with a 5 per cent deposit, the borrower owns less of the property than a traditional buyer and is therefore more at risk of negative equity if house prices fall.

The National Audit Office had previously warned the government the scheme posed such a risk, but this is the first time the FCA has joined the chorus of concern.

Nick Morrey, product technical officer at John Charcol, agreed the scheme opened borrowers up to such a risk but added it was only a “loss on paper” unless the buyer was forced to sell.

He said: “Being in negative equity is a loss on paper that only crystalises when the sale goes ahead, so it’s not a genuine problem until the borrower has to sell.

“However, the costs of mortgage products may be considerably higher for borrowers in negative equity as the lenders are not keen to take on the extra risk.”

Jane King, mortgage adviser at Ashridge Financial, said it was an “inherent problem” with all new builds exacerbated by the Help to Buy structure.

She said: “It’s not going to take much in a drop in prices for negative equity to occur by the time the loan is due in five years' time. Prices have stabilised and borrowers may well find they are in negative equity. 

“People get so excited about owning a home they do not think about the potential consequences. It’s all very well getting people in the homes but it’s when they want to move the problems occur and people get stuck.”