From next Monday, borrowers will find it easier to buy a home with just a 5 per cent deposit after the government launches the second part of its Help to Buy scheme.
David Cameron, UK prime minister, announced at the weekend that he was bringing forward the launch of its government-backed mortgage scheme from January 2014 to next week, because it was “not right” that young people and families had to rely on rich parents to get their foot on the housing ladder.
The £12bn scheme, which will underwrite about £130bn of mortgages over the next three years, has sparked concerns that it will help stoke another house price boom.
FT Money takes a look at the key questions about the second – and more controversial – part of the Help to Buy scheme.
What is Help to Buy?
Help to Buy consists of two main policies designed to help borrowers with deposits of just 5 per cent get on to the property ladder. The first part of the scheme was launched in April and offers loans of up to 20 per cent to all homebuyers purchasing a new-build property up to the value of £600,000.
The loan will be interest-free for the first five years, after which buyers must pay an annual fee of 1.75 per cent of the loan, rising annually by retail price inflation plus 1 per cent. Borrowers can repay the loan at any time.
A British bubble
The second part of the scheme – the mortgage guarantee – will allow buyers of properties valued at less than £600,000 to borrow with a deposit of just 5 per cent of the property’s price.
Unlike the equity loan scheme, the mortgage guarantee will apply to all property purchases, not just new-build homes. The government will guarantee up to 15 per cent of the home loan as an insurance policy for the banks.
Who can apply?
The mortgage guarantee scheme is available to all borrowers – not just first-time buyers – purchasing a property up to the value of £600,000.
Buy-to-let landlords, people looking to buy a second home, or foreign buyers with no credit history in the UK will not be able to get a loan.
The scheme is also open to so-called mortgage prisoners – borrowers who cannot move home or remortgage because of a lack of equity.
Will it be easy to get a mortgage through the scheme?
Not necessarily. The mortgage guarantee scheme has been designed to boost the number of high loan-to-value mortgages on offer, but the government has stressed that only borrowers that meet lenders’ strict income tests will be able to get a mortgage through the scheme.
You take a nurse married to a teacher. They’re both earning £25,000 – that’s pretty close to average full-time earnings. If they want to buy a £200,000 house, they’re going to have to find a £40,000 deposit. Now, they can’t do that, unless they’ve got rich parents. That’s not right
– David Cameron
For example, borrowers won’t be able to access guaranteed mortgages if their credit history fails to meet the city regulator’s “impaired credit” standards, including having a county court judgment over £500 in the past three years.
Interest-only mortgages or self-certified mortgages will not be offered through the scheme.
How do I access the mortgage guarantee scheme?
Only two lenders – Lloyds Banking Group and Royal Bank of Scotland – have confirmed they are taking part in the scheme from the outset.
Lloyds will offer the mortgages through its Halifax brand and via its telephone, branch and broker network. Both RBS and its sister brand NatWest will offer the loans through its branches and by telephone.
More lenders are expected to take part in the coming months. However, the scheme is voluntary, so it is up to each provider whether they want to take part. Lenders will have to pay the government a fee to be given the guarantee and they will have to take a 5 per cent share of any net losses. As a result, many banks will need to decide whether it is feasible commercially.
What rates are on offer?
Lenders have not yet revealed what mortgage rates they will be charging, but details are expected next week.
I’ve found it hard to remortgage, can I access the scheme?
The details of the scheme say that it can be used by borrowers simply looking to remortgage to a better deal, rather than only when people move home.
However, there will be certain rules to ensure that lenders cannot just use the scheme to restructure the riskiest parts of their existing loan books. For this reason, borrowers that want to access the scheme would have to remortgage with a different lender.
What are the risks of the scheme?
Critics of the scheme say it will inflate house prices even more, making houses ever more unaffordable for future generations. Experts also point to the fact that the scheme fails to deal with the real problem: a lack of housebuilding.
How long will the scheme last?
The mortgage guarantee scheme will be in place for three years. However, last week George Osborne, chancellor of the exchequer, said the Bank of England will be given powers to place an emergency brake on the scheme should signs of a bubble emerge. The BoE will be able to recommend that Mr Osborne lowers the £600,000 cap on properties eligible under the scheme to reduce its availability to would-be homeowners wishing to enter London’s booming property market.