Jeff Salway: Fears over new mortgage support scheme

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It WAS the headline-grabber in the 2013 Budget, yet the mortgage support scheme unveiled on Wednesday could do more harm than good, experts warn.

The help-to-buy (HtB) initiative unveiled by Chancellor George Osborne aims to get more people onto the housing ladder by making it easier to overcome the hurdle of high deposits.

The move was welcomed by house builders, estate agents and lenders as giving the ailing housing market a timely shot in the arm. Yet there are concerns that in the long-term it could ultimately harm first-time buyers by inflating house prices and making it even harder to secure the deposits needed.

The plan features a mortgage guarantee, starting next January, aimed at encouraging lenders to offer affordable loans to borrowers with deposits of between 5 and 20 per cent. There’s also a shared equity element that isn’t open to borrowers north of the Border, although there are calls for the Scottish government to introduce a mirror scheme.

HtB arrives weeks after it was revealed that first-time buyer numbers in Scotland last year reached their highest level since 2008. The cost of the average 90 per cent loan-to-value (LTV) deal fell towards the end of 2012 in response to the Bank of England’s funding for lending scheme (FLS), launched in the summer and giving lenders access to cheaper borrowing.

It also comes just months after the launch of the Scottish government’s MI New Home scheme, based on guarantees encouraging lenders to make more loans available at 95 per cent LTV.

But will the latest government-backed housing market package help matters or simply hinder? It has been claimed that the move could support up to 25,000 more home sales every year, though that overlooks the fact that part of HtB only applies to buyers in England. But much of the success of HtB depends on lenders who, while gradually reducing mortgages rates, remain unwilling to lend to first-time buyers without perfect credit records.

Robert Carroll, director of Mov8 Real Estate in Edinburgh, said: “It’s not all about deposits. Lender criteria about whom they will lend to have also tightened, making it more difficult to get a mortgage even if you do have the required deposit.

“It is, of course, helpful if the Government will help buyers with a deposit, but it doesn’t address the issue of the tighter criteria for who the lenders will lend to.”

And early reports suggest that not all lenders will sign up due to the cost involved and the fact that they would ultimately have to cover any losses. Those that do join up may pass on those extra costs to borrowers in the form of higher mortgage rates, reversing the recent trend towards cheaper first-time buyer loans.

Then there’s the issue of who can benefit. While first-time buyers are the target, the Budget small print makes it clear that existing homeowners can take advantage too. As it stands that may result in the scheme helping people buy second homes, squeezing first-timers out of the market in the process.

So the devil, as always, lies in the detail. But schemes such as this do often deliver, Scottish mortgage experts say.

They point to the Scottish Government’s Lift – Low-cost Initiative for First-Time buyers. Lift – which recently received a £20 million funding boost – is based on shared equity, where the government takes a stake in the purchase to reduce the upfront cost.

Alison Mitchell, of Robson Macintosh, an Edinburgh IFA, said: “I have seen the Lift scheme work many, many times. It does actually do what it says on the tin.”

She believes HtB can further help first-time buyers.

“Lenders are happy to lend with the backing of the government and buyers are only obliged to gather a minimum 5 per cent deposit, with the remainder given in the form of a repayable grant,” said Mitchell.

“Couple this with the strict turnaround times and you have a fantastic product that actually gets people moving.”

Others are less convinced, warning of an upwards effect on house prices squeezing more would-be owners out of the market.

David Alexander, managing director of letting agency DJ Alexander, said: “If this scheme has any effect at all I think it will be to create a demand that will fuel house prices, so what first-time buyers might gain on the roundabout through they will lose on the swings.”

Alexander has little faith in political solutions to housing market issues. “Perhaps the Chancellor would have been better focussing more on creating the type of economic conditions that will fully restore confidence and allow the sector to recover of its own volition,” he said.

He is not alone in asking if the government’s latest plan fails to tackle the main problems affecting the housing market. An obvious one is the lack of supply of affordable housing, said Dr John Boyle, head of research at Rettie & Co.

“Scotland has huge housing waiting lists, a lack of affordable housing, a lack of social housing, and a very low level of new house- building.

“At the same time, we have very low interest rates, but seem incapable of allowing borrowing to boost vital infrastructure.”

Shared equity schemes help sell homes, said Boyle, with numerous housing developments in Scotland relying heavily on the likes of MI New Home in recent years.

But failure to tackle the supply problem only stores up bigger problems for the housing market, he warned.

“As a result, we are going to continue to build houses at around one-third of levels actually required, pushing up rents and house prices over time,” added Boyle.

“I think this is a ticking time bomb – society will split into the ‘have houses’ and ‘can’t afford houses’ much more starkly than it does now.”

Case study: Happiness is her own dream home at last for Lisa

Lisa Brown put her dream of buying a home on the backburner last year, until she heard about the MI New Home scheme.

The task of saving up a 10 per cent deposit was proving a difficult one, putting her off looking for a place to buy after a spell researching the market last September. But over the Christmas holiday Lisa, a supervisor at Famous Grouse, heard about MI New Home, whereby lenders are encouraged by a Scottish Government guarantee to lend on new builds to those with deposits of just 5 per cent.

She was already renting in the Crieff area and wanted to settle locally. “I applied for the mortgage and paid the reservation fee before I’d even seen the property,” she admitted. “It was a new build and I knew where it was so I was comfortable doing that.”

The one-bedroom house was on a Stewart Milne Homes development, while the loan came from the Halifax. The speed of the process, from paying the reservation fee to moving in, took Lisa by surprise, although she boosted her chances by ensuring her credit record was squeaky-clean.

“It was so easy and stress-free. After the offer was accepted everything went like clockwork and I moved in about a month ago,” she said.

“Without the scheme it would have taken a long time to save the deposit needed and I might have given up.”