The Government announced at the weekend that the second phase of the Help to Buy scheme will be launched on 7th October, rather than January 2014. This will enable borrowers to buy a new or period home costing up to £600,000 with only a 5 per cent deposit. The Government will offer lenders a mortgage guarantee for 15 per cent of the purchase price.
While there is still some detail which has not been ironed out, such as the cost of the mortgage guarantee to lenders and whether they will get capital relief or not, lenders are equipped to cope with applications and there are many would-be buyers requiring high loan-to-values (LTVs) champing at the bit to participate in the scheme.
Lenders have learnt a lot from the downturn and we are highly unlikely to see a return to reckless lending. Instead, underwriting will be tight because even with a government guarantee in the background the lender is still advancing a very high loan-to-value and will want to see evidence that the borrower can afford the mortgage. A squeaky clean credit history will be a must.
Which lenders will participate in the Help to Buy 2 scheme and what will rates be?
Part of the problem for lenders declaring their intent lies in the number of unknown factors. Even though RBS and Lloyds are committed to the scheme, they have not yet decided how much their products will cost. To participate in the scheme lenders will pay the Government a commercial fee for each mortgage. And if it is unclear what the Government is going to charge for the mortgage guarantee element, it is to be expected lenders can’t decide on their final pricing. It is worth noting there is likely to be differentiated fee pricing for different LTV brackets, reflecting the sliding scale of risk.
Some are predicting the rates are likely to sit between 4.5 and 5 per cent for a two-year fix at 80 per cent LTV. This is roughly 2 per cent more than the current market-leading rate for a two-year fix, however it gives the borrower the chance to get on the housing ladder. Ultimately, increased competition among lenders should help push mortgage rates down.
Buyers will need to weigh up the cost benefit of going for the Help to Buy scheme versus alternatives such as rising rental values in some areas. Property finance specialists Anderson Harris can help if you need advice: please get in touch.