The Help To Buy mortgage indemnity scheme proposed by Chancellor of the Exchequer, George Osborne, in the budget announcement made last week is expected to raise both property transaction levels and property prices.
The Help To Buy mortgage indemnity scheme which kicks in next January is designed to generate £3.5 Billion (GBP) of new lending, could be administered by ‘bad banks’ Northern Rock Asset Management and Bradford & Bingley, now in the umbrella of UK Asset Resolution.
Lenders would have to pay to participate in the scheme, but the price has not yet been set.
Estate agents expect Help to Buy to enable people to buy both existing properties and new build homes with 95% mortgages.
The Treasury estimate that the scheme will support 190,000 property deals a year, in addition to the 74,000 residential property sales it expects to go through under the shared-equity part of the Help to Buy scheme, which starts next month and applies only to new-build properties.
As a result of the 95% mortgage scheme, residential property prices are forecast to rise by more than the current 11% prediction. These forecasts are expected to be revised as the scheme develops.
The Office for Budget Responsibility expects residential property prices to rise by 1.6% next year, and believes there will be significant growth in the UK housing market.
The notoriously gloomy Capital Economics, which had been expecting a 3% fall in house prices this year and a further 5% fall next year, now expects prices to remain flat – which, predictably, it does not see as good news.
Matthew Pointon of Capital Economics said: “By cutting the link to new housing supply, which was a key feature of previous schemes to boost house buying, the Government risks stoking up prices. We have long been of the view that house prices are unsustainably high, frustrating a generation of first-time buyers.”
The Help to Buy scheme still requires the Government to outline more details, but prospective property buyers should only need to finance a 5% deposit.
The Government will use taxpayers’ money to provide a seven-year guarantee worth up to 14.25% of the property value. Thus, on a £100,000 (GBP) property, a potential buyer would put up £5,000 (GBP) and the Government would guarantee £14,250 (GBP) against default, cutting the risk to the bank to just over £80,000 (GBP).
The guarantee would kick in if the property had to be repossessed by the lender and sold at a loss.
Mortgage lenders would have to pay to be able to take part in the scheme, and the Government is in talks with the Financial Services Authority (FSA) on this and other points.
A spokeswoman for the FSA said: “The cost that lenders will have to pay to take part in the scheme could make it uneconomical.”
Following the announcement made by Mr Osborne during the Budget speech, the national media and press were far from being complimentary about the introduction of the Help to Buy scheme.
The Mail on Sunday printed an article by deputy financial editor Simon Watkins, who said the scheme would be welcomed by those buying and selling houses, but he warned that it would drive up house prices further and leave the taxpayer exposed to any slump in the sector.
In the Sunday Telegraph, Kamal Ahmed was scathing about the likely role that Northern Rock could be playing and said “Osborne’s sub-prime mortgage mistake was a poison pill” which looks more toxic the more you look at it”.
The Budget documents state that the Help to Buy scheme will only be available to buy a home to live in, so it will not be available on buy to let mortgages. However, it is not clear whether it will stop people from renting out their current residential property and buying a new one using the scheme, or buying a property for their children to live in.
Speaking on Radio 4’s Today programme, George Osborne appeared unable to give a definitive explanation, saying the scheme was not to help people buy second homes, but was unable to say how they would be banned from doing so. He stated:”The mortgage market is an extremely complex thing, the intention of the scheme is absolutely clear, which is that it is for people who want to get their first home or have a home and want to move to a bigger home, because perhaps they have got a bigger family. We are working with the industry to get a scheme that works.”
Presumably, the Treasury will now work on the exclusions in the smallprint. And the details will emerge at a later date.
What do you think about Help To Buy?
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