The UK’s Chancellor George Osborne was rather successful in getting more first-time buyers on the property ladder, with the introduction of Funding for Lending and New Buy Scheme for new properties. This brought a much sought after boost to the property market and the construction industry. So much so, that he decided to extend this by introducing Help to Buy scheme (II) starting from the 1st of January 2014 for all properties under £600,000. First-time buyers and home movers will be able to buy a house (new built or existing) using only a 5% deposit.
Lenders have been issued with the details of the government's Help to buy mortgage guarantee scheme, to enable them to start boosting high loan to value (LTV - 95%) lending by next January 2014.
It is anticipated that Help to Buy will benefit the whole market (even more), particularly existing home owners who want to move up the housing ladder but have been unable to do so in the last few years. The scheme will last for the next three years.
Under the rules, anybody wishing to borrow money must be able to afford the mortgage payments and will be subject to income verification and stress testing, as set out in the Financial Conduct Authority's (FCA) Mortgage Market Review. This is positive news, as it helps avoid a scenario of subprime lending with an official seal. Borrowers will not be able to access guaranteed mortgages if their credit history doesn't meet FCA impaired credit standards.
Borrowers will NOT be able to use this mortgage guarantee scheme to buy second homes. Lenders will be required to collect a declaration stating that the borrower has no interest in a property anywhere else in the world. It will not be possible to use Help to Buy in conjunction with any other government scheme, including the existing New Buy scheme.
Even though the Council of Mortgage Lenders welcomed the scheme, they pointed out that some details remain to be handed out, particularly the commercial fee for participation and how capital relief will work, in order to enable lenders to make an informed choice about their participation.
It is obvious that for the scheme to succeed and meet its full potential will require the active participation and support of plenty of the lenders, who will in turn need to price their products competitively. Over reliance on only a couple of High Street Lenders will not bring the required results. Therefore the Treasury will need to do a lot more work to encourage as many Lenders as possible to participate.
This three year scheme will be subject to review by the Financial Policy Committee. However, none of the parties involved anticipate that the scheme will be in force for much longer than already announced. Albeit the positive effect this will have, it may also backfire by creating an unhealthy increase in demand for homes pushing prices up artificially. The government also needs to consider a smooth exit from this scheme without causing a sudden shock to the market at the end of the three year period.
The Chancellor is right when he says that the aim of the scheme should be to support first time buyers and second time steppers as opposed to landlords and/or property investors.
It is crystal clear that the first phase of the scheme already in existence has already been successful and the government deserves all the credit for this. It came in at the right time and not only it has assisted first-time buyers to get closer to their dream of owning a home, but it also boosted the property market and the construction industry, having created a lot of jobs (it is estimated that for every new unit getting built in this country approximately 10 new jobs are created/or secured). Additionally it made money circulate in the market in general, avoiding stagnant market conditions (not only in property and construction).
I am not entirely convinced that the second phase of this scheme will perform in a similar manner as the first phase of this scheme. It is possible if things get out of hand to witness an overheated property market with extremely negative results. The government must avoid at all costs the unwelcomed effects of overstimulation of demand without the necessary increase of supply of new homes. Therefore the problem that needs to be addressed now is the supply of new housing, something that is absolutely necessary in this country.
This is a unique opportunity for the government to attempt to solve the shortage of housing or at least to reduce it. The supply of credit is important, but if accompanied by an effort to decrease the gap of supply and demand of housing, the existing government will have done this country a considerable service.
MARIO APOSTOLOU
Leading Property Expert
26.07.2013
