Banks accounting for about a third of the mortgage market will start offering taxpayer-subsidised mortgages in just over a week after the Government brought forward the launch date of its controversial Help to Buy scheme by three months.
The Prime Minister made the announcement on the eve of the Conservative party conference in Manchester.
He rejected fears the Help to Buy scheme will fuel a housing bubble.
Speaking on the BBC's Andrew Marr show he said the market was "recovering from a very low base" and first-time buyers needed help to get on the housing ladder.
"As prime minister I am not going to stand by while people's aspirations to get on the housing ladder are being trashed."
Adding:
"If we don't do this it will only be people with rich parents to help them who can get on the housing ladder - that is not fair, it is not right."
Some mortgage-lenders, including the Halifax, RBS and Nat West, have already signed up.
However, some of the biggest lenders including HSBC, Santander, Nationwide and Barclays - have yet to decide whether to take part.
Industry reactions:
Brian Murphy, head of lending at Mortgage Advice Bureau (MAB), comments:
“Consumers have grown accustomed to a limited supply of 95% mortgages ever since the recession, so the news of a bumper delivery ahead of schedule will rightly cause a wave of excitement. The Help to Buy mortgage guarantee has a clear purpose and will answer a real need by giving options to first time buyers and those homeowners who have seen their equity eroded and been unable to make their next move. It is undoubtedly a welcome initiative from a consumer point of view.
A key ambition over the next three years must be to re-establish 95% lending as part of a balanced and normally functioning market. With the government behind it, the market looks set for continued growth which will hopefully prompt a greater level of overall transactions and more willingness from lenders to get behind those buyers with limited deposits.
Clearly there will be a flurry of activity as lenders bring their implementation and delivery plans forwards, once the final details of the scheme are confirmed. The important thing is for consumers to get clear, consistent messages about the mortgage guarantees, how they work and where they are available. Rather than becoming an overnight sensation, it would be in everyone’s best interests if the scheme is managed in a steady and sustainable way.”
Angel Mas, President, Mortgage Insurance Europe at Genworth, said:
“It is very surprising that the scheme is being launched without clarity on key points such as the fee and the way in which capital relief will work.
Clear, predictable, up-front capital relief for lenders when they use the scheme is vital, otherwise lenders will have little incentive to participate. And this capital relief must be available to the private mortgage insurance market to create healthy competition with the Government scheme.
To protect the taxpayer from a house price bubble, it will also be essential for there to be adequate and 'commercial' pricing of the guarantee to protect the taxpayer from risk, for there to be vigilant monitoring of the scheme to ensure lending remains prudent, and for there to be an ‘exit strategy’ for when the scheme comes to an end.
Capital relief is not clear, the pricing is not clear and it is still unclear how lending will be monitored to avoid an erosion of underwriting standards, as happened in the last crisis with this kind of lending. UKAR has a role servicing the scheme and it will be critical to ensure that servicing standards are high and the loans are carefully monitored.
We have also seen nothing in the announcement to indicate how the Government will extricate themselves now they are committing the taxpayer to take on high loan-to-value mortgage debt. Clarity on this point is urgently required. There is a clear role for the private mortgage insurance industry to work with the Government on this but this needs to be considered now not in three years time.”
Peter Williams, Executive Director of the Intermediary Mortgage Lenders Association (IMLA), comments:
“Cutting the wait short for 95% government-backed mortgages will clearly give renewed hope to frustrated would-be homeowners across the country. The equity loan aspect of Help to Buy has been a resounding success and there is no doubt that the appetite exists for the new mortgage guarantee to fly off the shelves .
That said, higher loan to value (LTV) mortgages have already become more readily available as funding has improved and competition intensified. In that respect the government needed to get the scheme out earlier to have any real impact. The first time buyer market in the UK has been driven off 95% LTV loans for many years so fully restoring that market will be helpful and should boost transactions.
The announcement’s timing during conference season does make Help to Buy’s political purpose even more explicit in terms of boosting party morale and electoral prospects. While the Bank of England is preaching caution and careful monitoring of house price inflation, bringing the mortgage guarantee forward by three months opens the government up to accusations of pushing too far, too fast. But with central controls in place to deal with any downsides of the scheme, it should still be possible to manage this intervention successfully.
Clearly we can expect that the state supported lenders will be the first to open for business and accept applications for the scheme. But with final terms and conditions still to emerge – not to mention costs – most lenders will need time to reflect before deciding what their offer will be. It is vital we guard against the assumption that all lenders will be able to accept Help to Buy applications from day one, which may result in even greater frustration from staff and customers across the country.
It is also likely that we will see interventions in the scheme over its planned three year lifespan, so lenders and borrowers also face the uncertainty of regular changes in terms and conditions. IMLA members’ concerns about Help to Buy’s possible effects on house prices have been partly eased by the revised controls regime, but considerable uncertainties remain: not least because the housing market is now firmly in the party political headlights.”
Camilla Dell, Managing Partner of Black Brick, comments:
"Obviously the Help to Buy scheme is good news for first time buyers who, for many years, have been unable to get on the property ladder and have been forced to rent. However, the consequences of the government's intervention into the market in this way may not be for the better. Undoubtedly, the market sub £600k is likely to rise and get quite competitive, particularly as the second phase isn't limited to just new build.
The knock on effect is also likely to cause changes in the lower end of the rental market. Help to Buy will take hundreds of tenants out of the market and could cause rents for properties valued up to £600k to fall. In central London, this is likely to be seen on one bed and studio flats.
Whether it will be for the best remains to be seen - overall, I'm not sure it will be. The problem with Help to Buy is it's a bit like credit cards - people take on debt they can't afford, which is dangerous. In my opinion, the Government should really be addressing why housing is so expensive in the first place, rather than finding a way to fund it. We need to build more homes so that supply eventually meets with demand, and that's where Government's focus should lie."
Sue Foxley, Head of Research at Cluttons, said:
“Driving ahead with the second stage of Help to Buy is a certainly a bold move by the Prime Minister and reinforces his commitment to bolstering the property market, however, he needs to be careful to not exacerbate the housing challenge faced by aspiring home owners.
Our latest research indicates that over a third of renters are currently concerned that they need to buy before prices rise any further, yet, increasing funding in the absence of new supply in the capital and the highly restricted residential areas in south east will hike-up prices well ahead of earnings and do little to alleviate renters’ fears.”
Nigel Morton, Head of Real Estate for Charles Russell’s Cheltenham Office, commented:
"It was surprising to hear the government’s proposals at their annual conference to bring the Help to Buy Scheme forward by three months. The government needs to ensure that this is not a rushed decision and that it has been fully thought through and adequate safeguards developed to avoid any risks. As with any insurance contract, pricing is key. If the premium is miscalculated then either the lenders will not want to participate, or the government will be handing them a get out of jail free card. This is potentially dangerous as the government is effectively making a one way bet on the UK housing market over the next decade. In the event that the economic recovery falters during this period (or the Bank of England is forced to raise interest rates) precipitating a rise in defaults, lenders might be less inclined to show leniency over repossessions since it would be the government taking any loss and not them.
The government has given the Bank of England power to review the scheme every September and make recommendations concerning the pricing, upper threshold and continuity of the scheme. It is encouraging that the Treasury have stated that they will follow these recommendations although it remains to be seen what will happen if such recommendations run contrary to the political mood of the day."
