One of the Chancellor’s flagship schemes to boost the large mortgage market in the UK has been roundly criticised by experts as more details emerged of how the scheme will work.
The Help to Buy initiative aims to boost mortgage lending by underwriting high loan to value house purchase mortgages. However, the scheme has come under fire from a range of experts with one leading business organisation calling it ‘very dangerous’. The Institute of Directors believes that the scheme will create another housing bubble and called for George Osborne to rethink his plans.
Here, we look at how the Help to Buy scheme will work and why critics are unconvinced that it will work.
How will the Help to Buy scheme work?
The mortgage guarantee element of the Help to Buy scheme is due to come into effect in January 2014. Its aim is to help people to obtain a high value mortgage without the need for a large deposit. The scheme will apply to all homes – not just new-build properties – and will be available to both homeowners and first-time buyers.
Under the plans, the government will make available £12 billion of guarantees to lenders. Banks and building societies who offer low-deposit mortgages will then have the opportunity to buy a guarantee on the portion of the mortgage between 80 per cent and 95 per cent.
If a borrower gets into financial difficulty and their property is repossessed, the government will cover part of the lender’s losses. For example, a family buying a £250,000 home would be able to put down a 5 per cent deposit and take out a 95 per cent mortgage for the rest. That means they would be borrowing £237,500, of which the first £37,500 would be covered by the government guarantee.
The first part of the scheme was launched in April to help homebuyers obtain a high value mortgage on a new build property. It has been credited with boosting the property market, with recent data from the British Bankers’ Association revealing that the number of mortgages approved by UK banks for house purchases leapt by a third in June when compared with June 2012.
Details emerge of how Help to Buy scheme will support the large mortgage market
The government has now disclosed some of the rules for the second stage of Help to Buy which, according to the Guardian, they say are ‘designed to ensure responsible lending and borrowing’.
For example, someone with a county court judgment for more than £500 registered in the last three years would not be able to access the scheme. And, those who apply will be subject to income checks to ensure they can afford the guaranteed loans.
The plans have been criticised by many experts who believe it will simply have the effect of driving up house prices. Graeme Leach, chief economist at the Institute of Directors, said: “The housing market needs help to supply, not help to buy, and the extension of this scheme is very dangerous … the world must have gone mad for us to now be discussing endless taxpayer guarantees for mortgages.”
The Homeowners Alliance, a consumer campaign group for property owners and would-be buyers, said that if the scheme was allowed to drive up house prices ‘it could cause a bubble and encourage people to take on huge mortgages that could be devastating in the long run’.