In this month’s Mortgage Strategy economic tracker, Andrew Baddeley-Chappell, Nationwide’s Head of Mortgage Strategy and Policy, analyses the growth of housing schemes and their impact on the mortgage market.
Andrew says, “The chancellor George Osborne’s Budget further indicated the Government’s desire to boost the housing market. The focus has moved away from solely first-time buyers with nearly all owner/occupiers in line to benefit from the new schemes.”
The Government has been keen, however, to put time limits on both initiatives and it will hope that learned behaviour and experience under the schemes will encourage continued activity after they end. It is a similar course to what is happening with Funding for Lending, where relatively low levels of usage have produced far greater volumes of lower-priced mortgages.
Help to Buy, of course, consists of two very different elements – a mortgage guarantee and an equity loan. The latter, a major widening of the existing FirstBuy scheme, is already live. The Government will provide buyers with a loan of up to 20 per cent of the value of a new-build home, with buyers supplying a 5 per cent deposit and lenders providing the rest.
The scheme is a major extension of the shared equity market. A product that started as an intermediate stage for people unable to own a property outright is now available to those willing to cede a stake in their property for either the option of a cheaper mortgage or a larger property than they would otherwise achieve. The core risk is that the scheme, in increasing demand, will drive up house prices rather than increase build quantities.
Equity share does not fit well with the FCA approach to mortgage lending – that customers must have a clear plan for outright home ownership. Its concern is that customers may not – as it has seen with interest-only – have plans or means in place to buy out the equity share. The risk is a clash between regulatory and Government policy with the industry in the middle.
The other element of Help to Buy, the mortgage guarantee, is planned for launch in January 2014. In some ways, it can be viewed as an extension to the existing NewBuy scheme in that it will also provide a mechanism for lenders to offer 95 per cent LTV mortgages, this time across new-buy, second-hand and remortgage markets (but not with the existing lender).
The guarantee arrangements are, however, very different from NewBuy, in which for each 95 per cent loan, 9 per cent is available in a pot to cover losses; for Help to Buy, the cover is 20 per cent. But on NewBuy, premiums are pooled and 95 per cent of any loss will be covered whereas on Help to Buy, only 20 per cent of the price is covered. So NewBuy sees less paid in but, assuming not everything goes bad, the total recoveries available are likely to be more.
With participation in Help to Buy optional, the possibility remains that lenders may retain NewBuy for NewBuild. They will be keen that the scheme gives them certainty of recovery where losses occur. It will be important for capital relief and will place an emphasis on upfront underwriting by government of lending activities. Given differences in lender underwriting, this will be a challenge and one the FCA effectively ducked with its own focus on affordability rather than credit worthiness. By setting a benchmark for the guarantee, it could be argued that the Government will in effect be determining the lending criteria for the market. The details and the practicalities of this still need to be worked through, and the overlap with the MMR delivery timetable will present a further challenge to lenders.
