George Osborne the Chancellor has outlined to ministers his latest attempt to kick-start the economy by spending billions of pounds on mortgage underwriting. Following on from his newbuild giveaway he is launching the mortgage guarantee element to Help to Buy from January 2014.
This scheme differs from the first scheme that was aimed at first time buyers buying new houses, in that in theory it is aimed at the whole of the market. However, it remains the same in that a deposit of only 5% is required, with the government getting prepared to make available 12 billion pounds of guarantees to lenders to support 130 billion of mortgages. This amount is predicted to be lent during the three years that the scheme is projected to run.
Essentially this money has to be committed by the government, as I presume that neither lenders nor insurers are prepared to take the risk of lending 95% mortgages in the current economic climate. This is happening when it is argued by many that house prices are historically still too high. So the government has stepped in to offer a guarantee that if a borrower gets into financial difficulties and is repossessed then we as tax payers will guarantee the top slice of the mortgage of between 80 and 95%. For example if a house is bought for £200,000 with a 5% deposit of £10,000, then the amount between £160,000 and £190,000 (80 to 95%) is covered by the taxpayers guarantee. Therefore the lender only has to recover £160,000 not to loose out with the taxpayer potentially losing £30,000 on the transaction.
As you can imagine the first scheme that is already running centred around newbuilds has been a roaring success with house builders such as Barretts having seen the share price increase by 136% over the last year. It also looks likely that the scheme starting in 2014 will continue to support the business community, as it opens up the market with second hand properties being allowed into the scheme.
Yet I am perhaps detecting a note of caution creeping into this second scheme from the chancellor, as many commentators have roundly criticize him for potentially creating a housing bubble. It has been indicated that if this housing bubble does ultimately pop it will mean great expense to the taxpayer. So he has already started to tighten the criteria for these mortgages by insisting that all second time buyers in the scheme must not own another property, and they sign a statement to confirm this. Also, anyone who has County Court Judgment for more than £500 registered against them in the last 3 years would be barred from applying for a mortgage with this scheme.
Hopefully Help to Buy turns out to be just what the economy needed to help it turn the corner and not just a cynical election ploy, but it is a very big gamble by the government, and if it all goes wrong then it may not comfort us too much to know that we are all in this together.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
5th August 2013
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