Budget 13: Capital relief central to success of Help to Buy, says CML

The Council of Mortgage Lenders says lenders’ ability to gain capital relief will determine how successful its newly announced Help to Buy scheme will be.

The scheme, which was announced in today’s Budget, will allow all homeowners with a 5 per cent deposit to access loans, with the Government providing a guarantee against the loan.

Similar to NewBuy, except not limited to new-build properties, it will launch at the beginning of 2014 and will run for three years.

It will also have a new government guarantee scheme designed to support the widening the availability of low deposit mortgages, just as the Government currently has with NewBuy.

When NewBuy was first launched it was hoped that with the Government effectively providing mortgage insurance (also known as a mortgage indemnity guarantee) on the loans generated, that it would enable lenders to gain some form of capital relief and lend a higher proportion of the purchase price without the level of risk that would normally arise.

As a result lenders would not have to hold such high levels of capital as would normally be required on 90-95 per cent lending.

But so far only one of the six lenders involved in the NewBuy scheme, Barclays, is understand to have so far gained the necessary capital relief.

The CML says that in order to produce products that are attractive to both borrowers and lenders under the Help to Buy scheme, the Government will need to ensure that all lenders will be able to gain capital relief in recognition of the risk mitigation offered by the Government guarantee.

It says: “Without capital relief, and depending on the size of the fee, the cost of the commercial fee that lenders will have to pay to gain the benefit of the scheme could make the scheme uneconomical.”

But if the scheme is successful scheme the trade body says it could ultimately enable lenders to offer more low-deposit loans than they would otherwise be able to do without incurring concerns from funding markets, prudential regulators, or their own internal risk committees.