For the UK’s mortgage market 2013 will be remembered for three simple words – Help to Buy.
The Funding for Lending Scheme may have got the market back on its feet in 2012, but it was 2013 when it progressed to a steady run and that was in no small part assisted by the giant hand of Government and its Help to Buy scheme.
It was first announced by the Chancellor George Osborne in his 20 March Budget, with two schemes aimed at getting first-time buyers on to the housing ladder and second steppers on the move.
Under the equity loan scheme Help to Buy 1 buyers can purchase new build homes with a 5 per cent deposit, with an equity loan from the Government of up to 20 per cent on properties with a value of £600,000 or less. And it has been a rip-roaring success.
In the first six months since it was launched to the end of September there were 5,375 properties bought with the support of the Help to Buy 1.
The average price of a property bought under the scheme was £194,167, with an average equity loan of £38,703 and 92 per cent were to first-time buyers.
The mortgage indemnity guarantee version Help to Buy 2, was not due to be launched until 2014 but in September at the Conservative party conference the Prime Minister David Cameron announced he was rolling it out early, and the first products were available by October.
But how easy is it for brokers to actually place the deals with Help to Buy 1 and 2? Is it having a knock on effect on the housing market with more properties being built? And with the Bank of England’s governor Mark Carney highlighting the growing rise in high LTV lending in the Bank’s recent Financial Stability report, is there a conflict between the Government’s attempts to boost lending and the Bank’s attempts to ensure the market doesn’t overheat?
To debate all these questions and more Mortgage Strategy, in association with Halifax Intermediaries, invited the great and the good of the mortgage and building worlds to a roundtable discussion.
Question 1: What impact are both Help to Buy schemes having on mortgage lending?
Andrew Montlake: It seems to have had a big impact in terms of actually getting everyone talking about mortgages and mortgage finance. More first-time buyers now think there are more mortgages available which means we are getting more enquiries through. It might not be necessarily about 95 per cent LTV mortgages per se, but the schemes are helping with buyer sentiment out there.
Andy Hulme: I agree – the initial equity loan Help to Buy scheme that we saw roll out in the spring has obviously helped builders and now with the indemnity guarantee version of Help to Buy we’ve seen a huge increase in demand. Currently we have had around 2,500 applications on the Help to Buy 2 scheme which is a really positive start.
Peter Curran: And that’s accepted applications. There were some initial questions surrounding whether people would get these mortgages. Well, the fact that 2,500 have been approved is testament to the fact that there are people out there who qualify.
Question 2: How easy is it to get Help to Buy 2 clients through the application process?
Montlake: Initially it was more difficult than it is now but I guess I don’t really blame lenders for that at all. If you were in their position, where the whole concept of Help to Buy 2 was brought forward with little warning and there are only two players in the market, it is a little unfair to think they are suddenly going to accept everyone. They just would have been inundated. So I think it will take time to even out. And now you’ve got the likes of HSBC, Aldermore and more set to enter the Help to Buy 2 market next year, it will be a much more level playing field and easier to ascertain the effect and how well it is working.
Hulme: For us this is about bringing forward lending to customers who have only got a 5 per cent deposit. But within that there is a need for us to make sure we are assessing affordability, that we’re making sure it’s sustainable and that ultimately we are acting responsibly. So we’re applying a fairly open minded but equally governed approach to ensure we are comfortable with the lending we are making. That’s right for us and our customers.
Tony Harris: I think a potential achilles heel with this whole initiative is the attitude of the Help to Buy assessors, who are typically housing associations that work via a form to gauge the applicant’s affordability.
My concern is that the Help to Buy assessors are ultimately the gatekeeper to the scheme and could limit access despite the best of intentions of government and lenders. We have had experience of securing clients an agreement in principle with lenders who were perfectly happy with the affordability, only to then have the assessor decline at the Help to Buy application stage. Two of my own mortgage brokers had this happen when they attempted to access Help to Buy, as the assessor’s view of commission was far more conservative than that of the lender they were using.
Question 3: With the Bank of England governor Mark Carney’s recent warning to borrowers to make sure they can afford their mortgage – do you feel confident that is something you are asking your customers?
Hulme: Yes definitely – all of our applications are assessed for both today and in a stress scenario for the future so we are safeguarding both our customer and ourselves about what may happen. At the same time Mark makes a good point – you need to think about the future as well as today. I think for ourselves it’s about saying you’re taking out a 25 year mortgage typically, you’ve got to look ahead.
Curran: The whole concept of Help to Buy 2 was to allow people a mortgage who didn’t have the deposit to get on the ladder. And the encouraging thing is that if the purchase price is £140-£150,000 where as before you needed a £15,000 deposit you now only need half of that. And that’s where I think a lot of the demand will be and what will free up some activity and confidence.
And also don’t forget part of Help to Buy was addressing the demand side to ensure you get a boost in confidence.
If you think back to before the Funding for Lending Scheme and Help to Buy and all the rest of it were introduced, we were looking at a market of £135bn.
And now in less than 16 months we’ve gone from £135bn, finished at £144bn in 2012, £170bn this year and even more next year. If the intention was to create confidence it has certainly done that. Yes there are other challenges but there is no doubt that the Government intervention has kick started what had been quite a flat market for a couple of years.
Question 4: Is Help to Buy resulting in more homes being built?
John Stewart: Help to Buy one certainly is, it’s too early to say on Help to Buy 2. If you look at the Government’s house building statistics, private starts in the first quarter of the scheme were up 33 per cent year-on-year and in the second quarter of the scheme up 29 per cent, which is a big jump in just two quarters.
Further back in the pipeline, registrations for the National House Building Council are up strongly and the Home Buyers Federation has published figures showing over the last 12 months planning permissions to be up 45 per cent from the trough in 2011. House builders had been already starting to gear up in terms of planning permissions before that, but that process has accelerated over the last few quarters. Reservations have also gone up significantly and if you have more reservations you have to build more. So it has definitely had a dramatic effect on house building but that is from a very low start.
David Thornton: It is interesting that both Help to Buy products have the same name when they are so different. We’ve seen a massive increase in interest about the shared equity Help to Buy product on the back of the publicity that has surrounded the launch of the mortgage guarantee version of Help to Buy. So despite the fact that Help to Buy one has been around since the beginning of April this year there were an awful lot of people that had not become aware of it. So we have actually seen the rate of Help to Buy 1 pick up a bit when you would normally expect the reservations to start slowing down.
Curran: Does that mean you will be building more or are your plans still the same?
Thornton: The trouble with house building is that you cannot just go from something to everything overnight. It takes a long while to build it up and a lot of the companies are having to rebuild the infrastructure to allow them to produce more. Persimmon has put the peddle to the metal, we are doing as much as we can.
However, there will be an increase in production that you will see in the figures for all businesses at the end of this year and it will be even greater next year. There’s an awful lot of people who are finding that their aspirations can now be achieved, with the added benefit that buying a house is cheaper than what they are paying out in rent.
Stewart: Normally you see a drop off in reservations in the summer with an autumn pick up. This year there was barely any summer lull and it just motored on. By now you would have started to see it fall away but it hasn’t – it really is quite remarkable.
Question 5: With reports of skyrocketing prices in some areas, is this being fueled by this pent up demand?
Thornton: We’re not seeing prices go through the roof but are not a house builder that is overly exposed in the South East. We’re based in the North of England, the provinces, not in London. We’re seeing a bit of price growth but nothing out of the ordinary. Our take on it would be that if there has been a bubble it’s been in the rented market.
Hulme: We certainly don’t see anything that is unsustainable. The majority of our customers, about eight out of 10 of them, are outside of London and the South East so for us if you take London and the South East out of it, where it is buoyant, there is huge demand.
Many parts of the country are genuinely benefitting from having mortgages with only a 5 per cent deposit.
Stewart: I would like to pick up on the term skyrocketing prices – there is absolutely no evidence of that. Prices in London, in particular Central London, are very high but that’s been happening for several years.
Evans: We get hung up on London but the dynamic in the capital is so different to other parts of the country. You’ve got a high proportion of cash buyers and international buyers that you just don’t see anywhere else.
Stewart: It’s a surreal debate though because we went for five years with little happening and then you have a bit of an uptick in prices and people start using phrases like boom and skyrocketing prices. I don’t know where it has come from.
Harris: The potential gatekeepers to a housing bubble are the valuers because they won’t sign their name to outrageous valuations from a housebuilder.
Lea Karasavvas: We’ve seen a lot of down valuations ourselves – people get carried away in the sealed bids going way overboard in valuations but ultimately the mortgage valuer will bring it straight back down to Earth again.
Question 6: Are both parts of the Help to Buy scheme targeting the right people?
Hulme: We’re seeing an average house price of about £160,000 which is slightly lower than the UK average. The customers are more likely to be first-time buyers. So you look at the scheme and it’s actually doing what it was created for – it’s helping first-time buyers, it’s helping those second steppers who are home movers. Under the equity scheme it is helping builders secure forward looking reservations and therefore have the confidence to build.
Curran: It’s helping people who have saved up between £5,000 and £10,000 to get on the ladder rather than needing £20,000. That’s what it was meant to do, all over the UK.
Stewart: The equity loan scheme has the affordability element as well. I suspect that many of the people that could buy under the equity loan scheme, Help to Buy 1, would not have just been able to toddle off and just get their full 95 per cent mortgage because the monthly repayments between the two are very different.
Stewart: The percentage of Help to Buy 1 customers who are first-time buyers is 92 per cent. Of the homes purchased to date using Help to Buy equity loan, the biggest amount, 32 per cent, were properties priced between £150,00 to £200,000. The median price for all purchases in the scheme so far has been £177,000.
So these are first-time buyers, at a relatively low price, it’s hitting exactly the people it is meant to hit.
Question 7: Has help to Buy resulted in lenders not participating in the scheme to lend above 90 per cent LTV?
Montlake: I’m not sure whether Help to Buy has been the catalyst or whether they would have got there anyway, but lenders like Yorkshire Group, Accord have stepped out with their own 95 per cent products. These lenders, in particular small building societies, have been doing their own 95 per cent LTV mortgages without the need for the Government backed scheme.
Karasavvas: Initially though the credit scoring for some of these lenders has been so tight it was virtually impossible to get them through. But as more lenders come to the marketplace next year, I would like to think that credit scoring would ease a bit next year and will be easier to place a 95 per cent deal when there is more competition.
Harris: The crucial bit on the number of lenders willing to play ball on higher LTV lending has been the re-entry into the market of the mortgage indemnity guarantee providers. That is where Help to Buy has really spurred them on as they were absent for so long. We do a lot of work with Newbury Building Society and it has a 95 per cent product, not backed by the Government, and that has been very positive.
Hulme: This is about accessibility and saying we need a number of lenders to step forward, take up the baton together and that will help to serve the demand that is out there.8
Question 8: One of the original aims of Help to Buy 2 was that it would free up second steppers to move up the housing ladder – is this happening?
Thornton: It is not happening really, it is predominantly first-time movers.
Curran: At the moment. In part the £600,000 limit on Help to Buy 2 was designed to allow second and third time movers to move without any more equity.
So £20,000 equity in a £200,000 property is 10 per cent but that £20,000 equity gets you £400,000 under Help to Buy 2. Now it has not happened that way, I agree, but it was part of the original rationale.
Montlake: One of the major issues has been stamp duty. If you are looking to move up to the next level why the hell are you going to pay £50,000 to £60,000 in stamp duty? That more than anything else is the problem.
Evans: But with second steppers, all of a sudden £50,000 to £60,000 equity that they might have that would have been eaten by the stamp duty, now with the new 95 per cent threshold I think next year we will see more movement on second steppers in Help to Buy 2. Without a shadow of a doubt, when more lenders come to the market and we will see that part of the market really kick off.
Question 9: Is Help to Buy having an effect on wider mortgage lending volumes?
Hulme: This year we’ve committed to lend £6.5bn to 60,000 first-time buyers which is the largest ever lending commitment to a first-time buyer in the UK and we are going to achieve that number and exceed that number. This is partially helped by the availability of funding, schemes like Help to Buy and actually the work we have been doing with the industry and the support that we have got from home builders.
If more first-time buyers come into the market, more second steppers come into the market and you start to feed the entire chain.
Curran: What you get are products at 95 per cent, then you also get more at 90 per cent, at 80 per cent and then all of a sudden there is just a lot more products available at reasonable rates and customers become aware of it and think “actually I can get a mortgage”.
It wasn’t long ago that that some customers thought you needed a 25 per cent mortgage, which was never true but there was this myth that you needed a massive deposit to get on the ladder and at least now people can get up to 95 per cent.