12 Mar 2012

NewBuy homes – should you buy one?

As the government launches a new programme for people who cannot raise the big deposits many mortgage lenders expect, Channel 4 News takes a close look at the NewBuy scheme.

NewBuy is designed for people who can afford monthly mortgage payments, but do not have the money they need for a typical 20 per cent deposit.

It is the brainchild of the Home Builders Federation (HBF), whose members account for 80 per cent of new homes built in England and Wales every year, and the Council of Mortgage Lenders (CML), which represents the banks and building societies responsible for 95 per cent of residential lending in the UK.

On offer is a 90-95 per cent mortgage for a new-build home in England priced at up to £500,000.

How does NewBuy work?

The scheme is partially underwritten by home builders and the government. The building industry will pay 3.5 per cent of the cost of new-build homes into a pot. If the borrower defaults, the home is repossessed and the lender is forced to sell that property at a loss, the lender is compensated by money from the pot.

If the money in the pot runs out, the government’s guarantee kicks in and the lender is entitled to 5.5 per cent of the loan from the taxpayer. The borrower will still be responsible for any shortfall between the sale price of the property and the outstanding mortgage debt.

The rationale is that while most of the risk will continue to fall on lenders and borrowers, more of that risk will be pooled in future.

Who will benefit?

NewBuy was initially designed for first-time buyers who cannot save enough for a 20 per cent deposit (the age of first-time buyers joining the property market without financial assistance from parents and others has crept up from 30 in 2008 to 33 today). But the scheme has now been extended to cover people who have previously owned their own home.

As many as 100,000 would-be buyers struggling to raise a deposit will be able to buy a new home, giving a boost to the construction industry, which expects to see 50,000 new jobs created.

This scheme is just a start; it will not solve the problem on its own. There are an estimated one million people, including 380,000 aspiring first-time buyers, who can afford mortgage repayments, but do not have a big enough deposit.

Which companies are involved?

Critics point to the fact that on launch day, just seven construction companies and three lenders are involved. Defenders say more will be coming on board.

The builders are some of Britain’s best-known construction firms: Barratt, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey. In total, the HBF says 130 small and large firms have expessed an interest in the scheme.

The lenders are Barclays, NatWest and Nationwide. Santander said on Monday it also planned to join up, adding in a statement: “Santander UK is in the final stages of agreeing partnerships with selected developers and will start to offer its first NewBuy mortgages via intermediaries with established ties to these house builders by the middle of the year.”

Halifax, which is currently liaising with 16 building companies, said in a statement: “In April, Halifax will be launching a range of products specially designed for the scheme. We are working closely with a number of housebuilders ahead of our product launch, and look forward to sharing the product details in due course.”

Taken together, these five lenders and their parent companies have a 73 per cent share of the mortgage market.

As the government launches a new programme for people who cannot raise the big deposits many mortgage lenders expect, Channel 4 News takes a close look at the NewBuy scheme (Reuters)

What mortgages are on offer?

Barclays is offering fixed-rate mortgages, for two and four years, for 4.99 and 5.89 per cent respectively. There is also a £499 arrangement fee and after the fixed-rate period ends, the mortgage reverts to a tracker rate of 4.49 per cent (base rate plus 3.99 per cent).

Natwest is charging 4.29 and 4.99 per cent on two and five-year fixed-rate deals. Like Barclays, there is a £499 arrangement fee and the mortgage reverts to 4 per cent after this loan period.

Nationwide, which is a building society, is offering three and five-year fixed-rate deals, charging 5.69 and 5.99 per cent respectively. There is an arrangement fee of £900, reduced to £500 for first-time buyers, and the loan swtiches to a variable rate of 3.99 per cent when the fixed-rate deal ends.

The Department of Communities and Local Government (DCLG) is so keen to advertise these deals that it uses the word just in front of the interest rates the lenders are charging – as in just 4.99 per cent.

Paula John, editor-in-chief of Your Mortgage, told Channel 4 News that all of the deals were “reasonably priced”, with NatWest the cheapest and Nationwide the most expensive.

She said Barclays’ tracker rate was expensive, adding: “After the fixed rate ends, this very high rate sends out the message that Barclays is not wanting people to sit around on this product.”

Referring to the DCLG’s use of the word just, Ms John said: “You would have thought that the government should be dispassionate. They should be just presenting the facts.”

How do you get one of these mortgages?

So far, 28,000 would-be buyers have expessed an interest in NewBuy. If you are interested in joining them, you will need to find out about new-build developments in the areas you want to live. The construction companies have details on their websites.

Visit these developments, where you will be able to discuss your requirements and view what is on offer. You will need a deposit of 5-10 per cent and what you can borrow will depend on your earnings.

You should approach a mortgage broker or one of the participating lenders directly. Although the scheme has government backing, this offers the lender some protection, but not you.

As the CML says: “The scheme does not change or reduce your personal responsibility in any way. The lender will still assess you to see if they think you will be able to afford the repayments from your income.

“You are responsible for paying your mortgage under the NewBuy scheme in exactly the same way as any other mortgage holder. And, if the lender has to repossess the property and sell it, you would be responsible for paying any shortfall between the amount you owe to the lender and the amount the lender sells the property for.”