20 Mar 2013

Osborne pledges help for homebuyers

Chancellor George Osborne unveils a new “help to buy” scheme to boost the housing industry, but lenders want assurances that it will not be uneconomical for them.

George Osborne told the Commons: “The deposits demanded for a mortgage these days put home ownership beyond the great majority, who can’t turn to their parents for a contribution.

“This budget proposes to put that right, and put it right in a dramatic way.”

His scheme, “help to buy”, has two elements; the first replaces the current “first buy” scheme; the second is new and is aimed at buyers who can raise a 95 per cent mortgage from a lender.

Option one (equity loan)

This is for new-build homes and is available to all buyers.

Participants need a 5 per cent deposit, with the government lending 20 per cent of the value of a home through an equity loan.

This loan can be repaid at any time, including when the home is sold.

People have to secure a 75 per cent mortgage from a bank or building society on a home worth up to £600,000.

The scheme starts on 1 April and will run for three years, with £3.5bn available.

Option two (mortgage guarantee)

This is for all homes, not just new-build, and all buyers.

A 5 per cent deposit is required for homes of up to £600,000.

The homebuyer then approaches a lender for a 95 per cent mortgage, with the government bearing some of the lender’s risk.

The lender has to pay a fee to the government for every would-be homeowner it helps.

If the home is repossessed, the government takes some of the hit: how much depends on what the home is subsequently sold for.

The scheme begins in January 2014 and will run for three years.

Lenders’ reaction

The Council of Mortgage Lenders (CML), which represents banks and building societies, has concerns about this second option.

It says that while it will “work constructively with government to help deliver a workable scheme …. the detail of its operation will be crucial to its success”.

The CML says it needs to know how big a fee it will be expected to pay the government.

Lenders have to hold capital in reserve for every home they finance. The bigger the mortgage, the more money they have to hold.

The CML is seeking assurances from the government that, as the taxpayer is underwriting part of the loan, lenders’ capital requirements should decrease to reflect this fact.

It said in a statement: “Without capital relief, and depending on the size of the fee, the cost of the commercial fee that lenders will have to pay to gain the benefit of the scheme could make the scheme uneconomical.”

It added that as the scheme would take time to design, “the benefits will not be immediate”.

But it said “a successful scheme could ultimately enable lenders to offer more low-deposit loans than they would otherwise be able to do”.

Stephen Noakes, mortgage director at Lloyds Banking Group, said “help to buy” could assist people struggling to take their second step on the housing ladder, many of whom bought at the top of the market and now find themselves trapped with little equity.

The Home Builders Federation said the extension of “first buy” to all buyers should lead to more construction.

Lenders, surveyors and estate agents are reporting signs that confidence is returning to the housing market following government schemes, such as “funding for lending“, which has led to rate cuts from lenders who now have access to cheap finance.

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