Chancellor George Osborne MP used the 2013 budget to set out plans for interest-free loans and guarantees to support £130 billion worth of new mortgages from 2014.
Under the proposals, people buying new homes up to a value of £600,000.00 can borrow 20% of the value of their property interest-free for a period of five years, in return for the government taking a stake in the equity. The government also introduced a new “mortgage guarantee” to help more people get a home loan without the need for a prohibitively large deposit.
In his Budget speech, the Chancellor outlined two measures to add impetus to house building and the housing market. The first measure is the “Help to Buy” scheme which will enable all purchasers to place a 5% deposit on newly built homes. This scheme is intended to run for a period of three years from 1 April 2013, and under it up to 20% of the cost of the home will be funded by a shared equity loan, financed by the government, which will be interest-free for the first five years. After the first five years, an annual fee of 1.75% will be levied on the government loan, and this fee will then rise annually by retail prices index (RPI) inflation plus 1% after that. The government states the equity loan can be repaid at any time, or on the sale of the property. Buyers will be able to access the scheme via participating house builders and “Home Buy agents” (those appointed by the government to provide a point of contact for those wishing to access affordable home ownership).
The second measure is a government mortgage guarantee scheme which will run for three years from the start of 2014 and will be used to support £130 billion of high “loan-to-value” (LTV) mortgages for both old and new homes. This scheme will see the government give lenders who offer mortgages to people with a deposit of between 5% and 20% the chance to buy a guarantee on the high LTV portion of the mortgage. That means if a borrower’s property were repossessed, the government would cover a chunk of the losses suffered by the lender. However, it remains to be seen how much lenders will have to pay for the guarantees – and how competitive the mortgage deals will be when they become available in January. The Council of Mortgage Lenders warned that if the cost was too high, this could make the scheme uneconomical.
On one hand the new measures present a significant step for many people struggling to raise a deposit, owing to rising levels of rent and many agree that the steps could unclog some of the blockages in the housing market, however some have criticised the measures citing a risk to taxpayers money if new homeowners defaulted on repayments.
Whilst the measures will be welcomed by home buyers, concerns as to their viability will be questioned following the Bank of England’s recent announcement that the authorities had for the first time applied a “risk weight floor” on UK mortgages and had requested that banks increase their own capital reserves. This may mean that banks and lending institutions are forced to hold more capital against their home loan portfolios at the very time the Help to Buy scheme is attempting to make mortgage borrowing more attractive to lenders.
Officials at the Treasury and the Prudential Regulation Authority (who will shortly take over the supervision of the banking industry from the Financial Services Authority) are understood to be aware of the issue and are currently holding discussions to ensure that any new capital requirements do not end up negating Help to Buy.
If you wish to discuss the government’s new measures please contact our Head of Property Amrit Bhogal on 0121 450 7800 or at email@example.com.