Since David Cameron announced just over a week ago that the second phase of the Help to Buy scheme would be brought forward, the market has been buoyant with the potential that this could bring for the mortgage and home buying sector. Much has been made of the fact that this option will allow many who have previously been frozen out of moving or buying for the first time to make the first fledgling steps to making their dreams come true.
As lenders have cautiously reacted to Prime Minister’s announcement, it has taken a week for those willing to lend via the scheme to show their hand. As expected, many banks whom currently offer mortgage loans via current Government plans like the New Buy proposition have been the first to react. Natwest and the RBS group were the first to proclaim their backing, with Halifax following suit not long after. Other larger players such as Nationwide, Woolwich, HSBC and Virgin Money have now made it clear that they will also open their doors to those wishing to use the Government backed funds.
But what about those lenders who have previously appeared to be averse to offering funds via such methods? What is perhaps not widely known outside of the market is that building societies have struggled to justify lending through schemes like New Buy, because of the heavy financial burden of seeking capital relief to support loans at far higher loan to values.
When a lender looks to calculate the required banking capital needed to provide relief for the purpose of lending, two methods exist to manage this. Larger and wealthier lenders, i.e. the HSBC’s of this world, favour an internal system to calculate capital requirements, but the cost for this system can be prohibitive. On that basis, smaller lenders such as regional building societies utilise a less-costly external system, but due to the adherence to this process they have not met the Government’s guidelines in relation to capital relief to support schemes such as New Buy.
Now, under the second phase of the Help to Buy scheme smaller lenders will no longer have the same troubles. Part of this change relates to the way the method involves borrowers supplying a 5 per cent deposit, while the Government and Treasury offer guarantees to the lender to support the higher level of debt, This has spurred much positivity amongst the UK’s building societies, with many in this particular sector noting that the Treasury appears to have designed the scheme to widen the scope for competition, due to the alleviation of risk for the lender.
The head of mortgage policy for the Building Society Association, Paul Broadhead, remarked on the options this will provide to smaller lenders to provide capital relief: “I think it is welcome because, certainly for lenders using the standardised approach, they get some element of capital relief for loans. It is pretty marginal but it is more than they managed to achieve on New Buy. On this occasion I think the Treasury has done a pretty good job in designing a scheme [of capital relief] to try to level the playing field as much as possible.
I think it has ended up in a much better place [than New Buy], making sure the scheme is accessible for smaller lenders.”
All the positive talk of what the scheme will do for the market is useful, but many buyers have been scouring the news for confirmation of what interest rates will be offered by lenders for a mortgage through Help to Buy. The Government has set clear guidelines that rates should not break the 5-6 per cent barrier, and Natwest revealed yesterday that their best option would be set at 4.99 per cent for a two year fixed.
Many would-be borrowers may baulk at the interest rates that are likely to be on offer, but as Simon Butler of Contractor Mortgages Made Easy noted, the higher percentage rates may not be the end of the world. He said: “If lenders had been left to their own devices, it is likely that rates could have been set far higher, which would have really diminished the point of making a house purchase affordable.
But borrowers should really take note that lenders currently price loans for 90 per cent mortgage borrowing around 4-4.5 per cent interest. If a lender is willing to accept 5 per cent less for a deposit for purchases up to £600,000, and the worst that can happen is that the rate is set at half a percentage point higher, that looks like a reasonable proposition.”
Article By: Jon Shields, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080