Property | International

UK lenders welcome ‘Help to Buy’ mortgage scheme

£12b initiative, expected to launch in January 2014, will give buyers of all properties ability to borrow with only a 5% deposit

  • By Tanya Powley, Gill Plimmer and Kiran Stacey; Financial Times
  • Published: 14:24 July 24, 2013
  • Gulf News

London: Leading high street lenders have responded positively to the second phase of the government’s Help to Buy mortgage guarantee scheme amid a growing chorus of detractors who fear it will stoke a housing boom.

George Osborne, the chancellor, met the UK’s top lenders and housebuilders on Tuesday morning to discuss how the second — and more controversial — part of the Help to Buy scheme will work ahead of its January launch.

The £12 billion (Dh67.6 billion) mortgage guarantee scheme, which will launch in January 2014, will give buyers of all properties — not only new build — the ability to borrow with only a 5 per cent deposit. The government will guarantee a proportion of the home loan as an insurance policy for the banks, as long as the property is valued at less than £600,000. Existing homeowners can also use the scheme to remortgage their property.

Lenders were given a 50-page document of draft rules on Tuesday, which included detail on how the scheme would be restricted to those borrowers that can afford their mortgage. The chancellor believes this will help prevent the scheme from creating a property bubble.

Borrowers accessing the scheme will have to meet strict income checks, and will not be able to use it to purchase a buy-to-let property or a second home.

Lloyds Banking Group, the UK’s biggest mortgage lender, became the first of the main high street lenders to commit to the scheme.

“From all the information we’ve got at the moment, we are definitely in the camp where we will join the scheme,” said Stephen Noakes, director of mortgages at Lloyds Banking Group. “We’ll continue to work closely with the Treasury as they finalise the details, but fully expect to be ready to launch in January.”

While no detail was provided by the chancellor on what commercial fees lenders will have to pay the government to obtain the guarantee, lenders said they expected more information on this in the coming weeks.

This will give lenders an outline of the possible ranges of the commercial fee, provided by accountancy firm PwC, but these figures are not expected to be finalised until September.

The Council of Mortgage Lenders, the trade body, welcomed the progress report but said it needed to hear more information on how the commercial fee and capital relief will work before lenders could make an “informed choice” about their participation.

Paul Broadhead, head of mortgage policy at the Building Societies Association, said some lenders may find it challenging to meet the deadline because they are currently working towards the regulator’s new rules for the mortgage market, which come into effect in April 2014.

“We will share the draft rules of the scheme to our members so that they can understand whether there is anything in there that prevents them from joining the scheme,” said Broadhead.

While the scheme was welcomed by lenders, critics maintain it will do little to boost housing supply and instead inflate house prices and put home ownership even further out of reach for renters.

Labour expressed concern about the possible consequences of the government’s housing policy. Jack Dromey, the shadow housing minister, said: “There is now widespread criticism that this scheme will do little to bring the cost of housing within the reach of low and middle income earners.”

Dromey added: “Unless the government finally acts to build more affordable homes, then home ownership for millions of first time buyers will remain but a dream.”

The Institute of Directors said the housing market needed “help to supply, not help to buy”.

Graeme Leach, chief economist, said: “Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already overvalued.”

However, housebuilders, which have seen their profits boosted by the first part of the Help to Buy scheme said the industry should benefit from rising confidence in the housing market.

Since Help to Buy was launched in April, it has been used on nearly 7,000 transactions involving new build homes totalling £1.3 billion — about a third of the major housebuilder’s sales in this period.

Barratt said: “It stimulates the housing market as a whole and pushes liquidity and confidence more generally.

“It’s hard to say what the exact impact will be because we don’t know what the take-up of that scheme will be; some people are saying Help to Buy is putting up prices already, but the numbers are too small.”

Barratt, which has spent £1 billion on land in the past year, has already boosted the number of homes built by about 20 per cent over the past two years and hopes to repeat that between now and 2016.

It increased the number of homes built 6 per cent last year to 13,663 homes and plans to raise this to 16,000 homes by 2016. Despite the rise, this is still well below the 22,000 homes it built in 2007.

Bellway, the housebuilder, said: “There could well be a knock-on effect on the new build market; it will definitely maintain demand and stimulate housebuilding.”