BLOG: Current Help to Buy rates hold back mortgage boom
As we all know Help to Buy is in practice a mortgage indemnity scheme insured by the government which insures 15% of the total loan as long as the borrower has put in a 5% deposit.
This means in theory the bank is taking the same risk with an 80% LTV mortgage as they are with a 95% LTV mortgage insured under the scheme. However because of FCA rules on keeping more capital at higher loan-to-value mortgages and the fact the lenders have to pay for the guarantee, the loans are much more expensive to provide than 80% LTV mortgages and are actually being priced nearer to 95% mortgages.
Now Help to Buy exists the argument often made against it is the market will become flooded with buyers who suddenly have access to mortgages through the Help to Buy scheme which will force prices up as demand outstrips supply, leading to a price bubble.
But what largely seems to have been ignored by some is 95% mortgages were previously available before Help to Buy. Whilst the new rates are cheaper they are on average only 0.5% lower than the equivalent non-Help to Buy rates, this small reduction in unlikely to cause a boom in purchasers and therefore prices.
In many areas around the country the biggest barrier to buying is affordability and the high income multiples needed to obtain the large mortgages needed to buy. With lenders imposing a maximum income multiple of four times salary for Help to Buy mortgages, for most, the gap between what they can borrow and what they can buy means they require far more than a 5% deposit. For them the availability of slightly cheaper money at 95% doesn’t really help them.
Help to Buy will make a difference. It will encourage many who currently don’t own to start thinking about buying. It is also likely force down the rates of loans over 80% LTV, which will also encourage some to buy.
However the reality is for most people queuing up at the banks to take advantage of Help to Buy is that it is unlikely to help them to get onto the property ladder. For most the banks especially those dealing directly are going to end up disappointing a lot of people when the reality of the 2013 housing market is explained to them.
Stuart Freeman is director of Redbrick Financial Solutions