The help to buy scheme is undoubtedly a good thing for potential home buyers and home movers who wouldn’t otherwise be able to obtain the mortgage they need. The potential negative knock on affects on the rest of the economy are yet to unfold, but you can’t get to fourth base without taking your foot off third and it is a brave step we are taking in our road to recovery.
The big questions I have are; how much has the government’s involvement been needed here, and are they really the ones extending the helping hand?
For the borrower, they are not really part of any scheme as such, and this has been the cause of much confusion. To the borrower it is simply nothing more than a 95% loan to value mortgage. This scheme is really only helping the lenders to then help the borrowers. Mortgages up to 95% loan to value have been available in some form since the middle of 2009, so this isn’t some new innovative product which has come to market, it is just increasing the number of products available, to hopefully push up competition. Many of those who are eligible for these mortgages now, could have probably got one anyway.
The way the scheme works, is that lenders will pay a fee so that they can buy a type of insurance policy which will pay out, should they not be able to recover all their losses in the event of a repossession which is in negative equity. The scheme is self-financing with lenders paying fees covering costs for expected losses, capital costs of providing the guarantee and any administrative costs. The fees are variable and will increase if there is a higher than expected level of payout requirement. This is only the initial information we have been given, but I can’t work out how the government are helping other than coming up with the idea. All the risk is still being taken by the lenders, it is just going to be on a collective basis now rather than on an individual lender basis. I don’t see much advantage to the lenders of being in this scheme, and why they can’t just self-insure, that way the risk isn’t pooled together with other lenders who may take bigger risks with their loans than you would like.
I do however feel the government have done well to trick lenders into a false sense of security. It is similar to you being afraid of jumping out of an aeroplane and somebody telling you it will be fine because they stand on the ground and watch you do it. So thank you and well done for getting lenders to be more daring, but that is where it stops. Everything about the help to buy scheme to me just says vote for conservatives, from the timing to the naming of the scheme and the way it has been publicised. For the scheme to be successful from the consumer’s point of view we need to see lower rates than those currently available and also crucially loosen lending criteria.
It is all very well for the government to claim to open up the market for hard working families; the challenge is now on for them to ensure that enough people qualify for the scheme to enable it to get off the ground.
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.
Jason Hinde DipPFS
28th October 2013
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