A review of new home stimulus schemes in action today
There appear to be signs of a tentative improvement in the UK’s housing market, with Halifax’s most recent UK House Market Review quoting a 1.9% increase in house prices from February 2012 to February 2013. Coupled with this, Rightmove is boasting a significant increase in visitors to their website, making it the 6th most viewed site on the internet. Amidst these optimistic figures, the government has recently introduced a number of schemes designed to give the housing market a boost.
Launched in March 2012, the government backed ‘New Buy’ scheme has just celebrated its one year anniversary, which has seen around 3,000 new build homes reserved using this scheme. Designed for first time buyers and those who would like to move into a new home but only have a deposit saved of 5 – 10%, this scheme is designed to address the ‘deposit gap’ – the difference between the amount home owners have saved for their deposit and the minimum deposit banks will lend on.
The 71 new home builders who offer this scheme contribute 3.5% of each new build purchase price sold using New Buy into a pot which is used to protect the lenders from losses in cases where the purchaser defaults on their mortgage. Lending is subject to the bank or building societies usual criteria, and the value of the new build can be anything up to £500,000. Presently there are six lenders backing this scheme.
Earlier this year, the government and mortgage companies already signed up to the New Buy scheme agreed that they would now offer New Buy in conjunction with part exchange – for those with limited equity in their home who would like to move but need to sell first.
First Buy is the New Buy predecessor and is aimed solely at first time buyers. As these are seen as vital to the economies’ housing market, and with stricter conditions set by banks and building societies when looking at granting mortgages, this scheme is there to help with the vast deposits necessary today when purchasing a first home.
Typical lending criteria now is a minimum of 75 - 80% loan to value mortgage, meaning for an average house worth £165,000 a buyer would be expected to have at least £40,000 saved as a deposit.
First Buy allows first time buyers with a deposit of 5% to take out a mortgage worth up to 80% of the value of the new build home they are purchasing, and then the take out an equity loan for the remainder of the property’s value. This loan is interest free for the first five years and after the first year can be repaid to increase the purchaser’s share of the property. If the loan is not repaid, upon sale of the property, the First Buy agent is entitled to the same percentage of the purchase price as was initially loaned.
The government’s ‘Funding for Lending’ scheme is perhaps the one which has received the most media interest since its inception in August 2012. Simply put, the scheme rewards banks and building societies who increase their lending to UK households by allowing them to borrow more and for lower interest rates than the banks that reduce their lending. In a recent review of the scheme, there was much disappointment concerning its success after it emerged that net lending fell in the last quarter of 2012 by £2.4billion compared to the previous three months.
The Bank of England has argued that there is a time lag expected on a scheme of this type, there has been a real increase in the number of mortgages lent by banks and building societies in recent months, and average mortgage rates have fallen to 3.53% as a direct result of Funding for Lending.
Since the introduction of each scheme, they have all been received with a real mix of reviews. Funding for Lending has received the majority of its negative press regarding the number of loans granted to small businesses, rather than the effect it has had on interest rates. In its most recent reviews, it appears that the number of mortgages lent has actually increased since the scheme began. However there still seem to be some inherent flaws in the initiative.
New Buy and First Buy have both come under fire for only being directed at new build properties. Whereas this is good for the construction sector and, in theory, helps increase the economies housing supply, many argue that it does not help the housing market as a whole as a chain of two, between the first time buyer and the developer, does nothing to alleviate the problem of having many existing chains waiting on the crucial first time buyer. Further to this, research from Moneyfacts shows that 60% of the population say they aren’t interested in purchasing new build properties.
New Buy suffered a slow start as the lenders who had agreed to back the scheme increased their interest rates. These have now fallen again and reservation rates continue to improve.
First Buy has also been criticised as it could force people into negative equity, or block them from being able to sell their home. New build properties typically sell at a premium of 5 – 15%, and such a high loan to value ratio could force the vendors to stay in their home until they had repaid a sufficient amount of their mortgage to allow them to move, or until property prices rise.
So, in conclusion, there are mixed reviews for all schemes. They each depend on co-operation between lenders and new home builders and given that they are the only schemes available for our benefit, as an industry, we should support them as much as we possibly can.
