Help-to-Buy is the bright idea thought up by Treasury officials as a follow on the Bank of England’s £80bn funding for mortgage lending scheme, a scheme which subsidises mortgage rates offered by the principle mortgage lenders for new-build properties.
This new Treasury scheme, which was launched in April 2013, effectively subsidises a homebuyer’s deposit when purchasing a new-build property. Instead of them having to raise a 20% deposit the new buyer need save-up only 5% of the asking price, and the government initially pays the balance.
The first five years will be interest free, then it forms a part of the mortgage, to be paid back over 25 years, along with repayments on the whole loan. This scheme does not include buy-to-let and second-home buyers.
All the main banks and building societies have geared-up to offer loans under the scheme. This is on top of some building society schemes already running, such as the Nationwide and Leeds Building Society ones, which offer higher loan to value mortgages needing only 5% deposits, for those who can afford the monthly payments, but not the high deposits. In some cases these schemes are supported by local authorities.
However, some, including Business Secretary Vince Cable, have voiced their concerns about the possibility of the schemes leading to another property bubble. The Intermediary Mortgage Lenders Association has said that the Help-to-Buy scheme could trigger a property price rise of 11% by the end of 2016.
The danger is that the Government’s strategy of boosting a sluggish housing market with these subsidised mortgages could start to inflate house prices to their pre-crash levels, and therefore make it more difficult, not easier, for first time buyers to get onto the housing ladder.
Even Mark Carney, new governor at the Bank of England, in a speech this week, indicated there are concerns about the possibility of another housing bubble, and that he is prepared to take action to prevent the situation getting out of control again.
Mr Carney said the Bank could use new tools at its disposal to “restrict the terms on which new credit is provided, or even to raise capital requirements on mortgages or other types of lending”. This would represent a new strategy for the Bank, getting much more closely involved in the operation of banks and building societies than before.
House prices in central London are already above their 2007 peak, according to the Nationwide Building Society figures, but if you take the figures across the country as a whole, they still remain around 9% lower. According to the Intermediary Mortgage Lenders Association (IMLA), under these schemes the average UK home will cost £180,256 by the end of 2016. That figure would bring average prices near to 2007 peak of £181,975.
According to the Guardian newspaper all the major house buildings have welcomed the new scheme, from Bellway Homes, Barratt Developments and Taylor Wimpey, the three largest firms, to Persimmon and Bovis Homes.
Bellway Homes is the latest firm to reveal that the deposit subsidy scheme has boosted sales orders for new homes. This Newcastle-based builder thinks the scheme has boosted confidence across the country, bringing more house-hunters to its sites and lifting reservations of new homes by around 27% over last year’s levels.
By Tom Entwistle