Government measures to assist lenders

New Government measures, designed to help credit worthy buyers on and up the housing ladder, will stimulate the property market and boost house building.

The Help to Buy initiatives, which comprises of an equity loan scheme and a mortgage guarantee announced in the 2013 Budget, should have a much bigger impact on the number of property transactions and help more people to buy than previous schemes such as FirstBuy and NewBuy.

Although the Government expects the new two part initiative will help over 500,000 home buyers, Savills research estimates the move is more likely to help up to 400,000 buyers. As the equity loan part of the deal only applies to England, this figure could be higher if Welsh and Scottish versions were to be launched.

The take up will be limited by buyers’ affordability constraints and lenders’ take up of the initiative. For both schemes, borrowers will need to meet their chosen lender’s credit and affordability checks.

Although in theory, the scheme aims to allow buyers with deposits of 5% to purchase, in practice buyers with 10% deposits will be more likely to get a favourable response from lenders. About a third of the mortgage guarantee element is likely to be diverted to homeowners remortgaging.

Equity Loan: How will it work?

From 1 April 2013, up to £3.5 billion of Equity Loans worth up to 20% of the value of a property was made available from the Homes and Communities Agency (HCA) for those buying new build homes with a minimum deposit of 5%. The scheme will run for three years in England.

Buyers will still be required to secure a mortgage worth up to 75% of the property’s value. The new version is open to all buyers, not just first-time buyers, purchasing new build homes worth up to £600,000, provided the property is their only residence. Unlike FirstBuy, which required house builders to make up half of the equity loan, Help to Buy is fully funded by the Government.

This is how it breaks down:

For the first five years the equity loan will be interest free, after which you will pay a 'fee' of 1.75% rising annually by the increase in the Retail Price Index, plus 1%.

The loan will be repayable on sale of the property at which point the HCA will recover its equity share in the value of the property. As a backstop, the equity loan must be repaid after 25 years though early repayments of the equity loan are possible.

What is the likely take up and impact on the market?

The equity loan element of Help to Buy is effectively a more generous extension of the existing FirstBuy scheme which was introduced in 2011. Potentially it can provide funding for 75,000 extra equity loans in England between 2013 and 2016.

The fact that it is fully funded by the Government will open up the programme to smaller developers whose balance sheets did not allow for the extra loan commitment in the past. As a result there should be more widespread take up among house builders. The £600,000 ceiling also makes it attractive in London where prices are higher.

There is also established demand for equity loans among prospective homeowners. Over 2012/13 FirstBuy is likely to have supported an estimated 14,000 sales, in addition to around 2,000 supported by NewBuy (a mortgage indemnity scheme launched in 2012). These deals have accounted for between 20% and 25% of sales among major volume house builders. We anticipate the equity loan element of Help to Buy could build up the numbers of supported sales to more than 44,000 in 2015/16, particularly given its application beyond the first time buyer market.

On this basis we believe Help to Buy could increase levels of private sector house building by around 30% assuming that lenders are prepared to advance mortgages on the remaining 75% value of the property on competitive terms.

Taken from
Briefing Note: The Budget - How Help to Buy will affect the market