Jeff Salway: Property experts sceptical over new mortgage help for buyers

Published on 16/09/2012 00:00

The latest bid to stimulate demand in the housing market faces major hurdles, writes Jeff Salway

First-time buyers have been given fresh hope of securing a foothold on the property ladder after the launch of a scheme aimed at boosting Scotland’s ailing housing market. The government-backed MI New Home programme is a mortgage indemnity scheme designed to help buyers with small deposits – and not just first-timers – while stimulating demand in Scotland’s housebuilding sector.

However, the scheme, which was initially expected to launch early in the summer, has failed to secure significant lender backing, while experts warn that it fails to tackle the real problems in the market.

By offering mortgages needing downpayments of just 5 per cent, MI New Home aims to overcome one of the biggest obstacles facing buyers: stringent deposit requirements.

The average first-time buyer in Scotland currently needs a deposit of 20 per cent, double the amount prior to the credit crunch.

But how will the scheme really pan out? Here we look at what it involves and why some experts have their reservations.

What is it?

MI New Home brings together government, lenders and housebuilders in a bid to rejuvenate the Scottish housing market and deliver a boost for first-time buyers. The idea is to help buyers by encouraging lenders to offer 95 per cent loan-to-value (LTV) mortgages on new-build homes worth up to £250,000. It is also hoped that, by stimulating demand for new builds, the scheme will inject new life into Scotland’s housebuilding sector, with resultant benefits for the economy.

How will it work?

The scheme, which initially runs until March 2015, is based on guarantees offered to lenders and builders by the Scottish Government. In return for offering 95 per cent LTV deals, the lenders in the scheme – initially Royal Bank of Scotland and the Nationwide – benefit from a Scottish Government commitment to cover a certain amount of any losses they make on that lending. Bank of Scotland/Halifax are also lined up to join the programme.

Builders taking part in the scheme also get a Scottish Government guarantee to help cover losses, primarily in the form of indemnities.

Who is it for?

It’s aimed primarily at buyers with small deposits, who are currently struggling to secure affordable mortgages. Just a handful of lenders still offer loans requiring deposits as small as 5 per cent, including the Clydesdale. And while the number of first-time buyer loans has improved in recent months, those deals are typically twice as expensive as the best available to people with equity or deposits of more than 25 per cent.

For buyers taking advantage of the scheme, the Nationwide is offering a three-year fixed rate 95 per cent LTV deal with a rate of 5.49 per cent for first-time buyers. It’s reduced to 5.39 per cent for existing customers moving home. The building society also has a five-year fixed rate of 5.59 per cent for first-timers with a 5 per cent deposit, lowered to 5.39 per cent for existing customers moving home.

MI New Homes is also designed to help the wider Scottish housing industry. The trade body Homes for Scotland said the scheme will protect or create nearly 23,000 construction jobs by stimulating demand for new builds. The Scottish Government hopes that up to 6,000 new builds could be sold over the three-year duration of the scheme.

Mark Dyason, director of Edinburgh Mortgage Advice, said: “It helps the builders get stock off their books that would currently be difficult to sell – ie new-build flats – because the very same lenders backing the scheme were insisting on very large deposits.”

I’m saving for a new home. How do I qualify?

If you have a deposit of 5 to 10 per cent of the property value you can apply for a loan and go through the lender’s assessment, as with any other mortgage. To take part in the scheme you must be buying a new-build home that’s being sold by one of the builders taking part in the scheme. There are currently 12 of them: Bancon, Barratt, Chap, Charles Church, David Wilson, Lovell, Merchant, Miller, Persimmon, Springfield, Stewart Milne and Taylor Wimpey.

The property can be worth no more than £250,000 and your purchase must be a normal one, which means shared ownership and shared equity deals are excluded. Deposits saved with the help of a local or other public authority cannot count towards the scheme.

It also has to be your principal residence and the buyer must be a UK citizen or have “indefinite leave to remain in the UK”. While the scheme mainly targets first-time buyers, it is open to existing homeowners too.

Will it really make a difference?

That’s the big question. Experts agree that lenders have made life difficult for buyers by tightening their criteria and are unconvinced that the scheme will soften lender attitudes towards first-time buyers in particular.

Dr John Boyle, head of research at Rettie & Co, welcomes the initiative. But he added: “Even with a government guarantee, my feeling is that most lenders don’t want to do anything risky – they are more interested in getting back on the rails themselves and repairing their balance sheets.”

He warned that while lenders appear open to business, buyers can expect to be turned down unless they can support their deposits with very clean credit records and affordability evidence.

“My sense is that while many of these innovations are well intentioned, there are not that many people actually going to take them up – or be allowed to,” said Boyle.

Any house price falls could also leave some buyers in trouble, Dyason pointed out.

“It certainly gets them a foothold in the market, but one at the riskiest end of the market. Any further unrest in the market will cause them to lose what deposit they have and perhaps enter negative equity,” he said. “The indemnity is to protect the lender, not the purchaser.”

Conversely, another danger is that by artificially boosting demand in Scotland, the scheme could push up house prices in some areas at a time when first-time buyers need them to fall further.

While he welcomes the initiative, Dyason believes the low confidence in the market remains a formidable obstacle.

“The real recovery will come when first-time buyers can enter the whole of the market at 90-95 per cent LTV and have confidence this is a good move,” he said.