The mortgage guarantee scheme is designed to help first-time buyers and
existing property owners move up the housing ladder providing borrowers with a
5% deposit the opportunity to buy property worth up to £600,000.
The Government will guarantee up to 15% of the loan at a cost to the
lender, allowing the borrower to access cheaper mortgage deals.
This differs from the first stage of Help to Buy. That scheme allows people taking
their first step onto the property ladder to borrow up to 20% of the value of a
new build home from the Government, interest-free for the first five years.
Borrowers need a 5% deposit and must take out a mortgage to cover the
remaining 75% of the cost of the property.
After the five-year interest-free period ends, borrowers will be charged
a fee of 1.75% of the loan’s value. This fee will increase every year at 1%
above inflation.
These fees only count toward the Government loan and come on top of the
mortgage repayments. Borrowers must pay back the equity loan when they sell the
home or at the end of the mortgage period - whichever comes first.
The mortgage guarantee scheme
- Help to Buy 2 - is available to both first-time buyers and existing homeowners
buying new build and older properties.
Borrowers will need a 5% deposit, while the lender will be able to buy a
guarantee from the Government covering up to 15% of the value of the property.
Both phases of the scheme are available on properties worth up to
£600,000.
So what are the pitfalls?
If house prices fall, hundreds of thousands of buyers on the scheme could
be left in negative equity.
If a property is repossessed because of default of the borrower, the
Government will guarantee 75% of the part of the loan above 80% of the loan to
value. The borrower will meet the other 25%. If there is insufficient funds to meet the loan the
borrower will still be liable to the lender for the whole of the loan even the
part guaranteed by the Government.
The other key question is whether mortgages offered through the scheme
will actually be any cheaper than those on the market at the moment, and
whether enough lenders will take part.
Banks need to pay a charge to have their mortgages guaranteed by the
Government, so are likely to build this sum into the total cost of the loan. It is likely that a sum equivalent to 1%
of the value of the property is to be placed into a reserve to cover
defaulters. The cost of this will
be passed onto the borrower.
Are these schemes the real solution to Britain’s housing crisis? Will they not keep house prices
artificially high, giving people no choice but to take out large loans that
could run out of control if interest rates rise?
Cambridge University study found last year that although shared
ownership schemes allow them to buy their first home, they do nothing to help
them buy their next home.
Cynics will say all of this amounts to nothing other than political
engineering reminiscent of the type of policy that led to the ‘boom and bust’
years. Ironic in some way given
this is a Conservative policy. We will just need to see what time brings.
