BLOG: Current Help to Buy rates hold back mortgage boom

Written by:
Sometimes when I read about the newest government mortgage support scheme, it feels like I am reading the script from a B movie where Help to Buy is playing the role of the villain.

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 

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

Coronavirus and your finances: what help can you get in the second lockdown?

News and updates on everything to do with coronavirus and your personal finances.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Top mobile apps to help cut the cost of Christmas

With Christmas fast approaching, many of us will be starting to think about budgeting for the festive period. Here's our...