The Mortgage Guarantee scheme

Mortgage Guarantee: How will it work?

From January 2014, the Government will also make £12 billion of guarantees available to lenders to encourage more lending at relatively high loan to values. Government figures suggest that this will support mortgage lending of up to £130 billion for those with deposits of between 5% and 20%. The scheme will run for three years.

Crucially, it will be available to existing homeowners as well as first-time buyers purchasing any home worth up to £600,000. It will apply to existing as well as new build stock and for re-mortgaging (where there is a change of lender) as well as house purchases. Qualifying loans will be on a capital repayment basis.

In the event of a repossession, the Government will compensate the lender for a portion of the net losses down to 80% of the purchase value of the property. Lenders will also take up 5% of the net losses above this 80% threshold. The guarantee lasts for seven years after the mortgage is originated. Lenders will also pay the Government a fee for each mortgage. Help to Buy excludes buy-to-let investors and second home buyers.

What is the likely take up?

Given that the full details of the new guarantee scheme have yet to be announced, it is difficult to assess its likely impact on the housing market and the extent to which it may stimulate demand.

Our research indicates that, if the full £130 billion of mortgage lending is achieved the Help to Buy mortgage indemnity guaranteed could support up to 870,000 loans over a three year period from the beginning of 2014.

However, full take up is unlikely. The final number and value of new housing transactions facilitated by the scheme will be dependent on:

• Take up from lenders who will be constrained by the wholesale lending markets

• Appetite from borrowers and the mortgage rates they are offered

• Borrowers' ability to meet the conditions for the guarantee

• The extent to which the scheme is used to remortgage rather than to purchase. We think that about a third of the funds will be used to refinance existing loans.

Few Help to Buy loans are likely to be at 95% loan-to-values. Judging from previous lending levels, there is much greater capacity for lending at between 80% and 90% LTV than above 90% LTV. We would also expect lenders to be more willing to lend in this band as it reduces their exposure to risk.

Homeowners who are currently unable to remortgage will be able take advantage of the scheme to refinance. Over the past four years, remortgages have accounted for 32% of all mortgage lending compared to 41% in the previous six.

We envisage lenders may favour such remortgaging over new lending for house purchase (even though it requires a change of lender) as they seek to limit their exposure to the property market. This will reduce the number of new housing transactions and in turn house building facilitated by the scheme.

Limits to take up:

The requirement of the Mortgage Guarantee scheme for mortgages to be on a capital repayment basis is likely to limit demand, restricting the risk of creating a price bubble. In the mortgage markets of 2004-2007, some 16% of first time buyer mortgages and 20% of home mover mortgages were on an interest-only basis. This has fallen to 1% for first time buyers and 8% for existing home movers. It is possible that the interest rate offered by lenders will be less competitive than open market deals.

There is also a requirement for an assessment of the borrower’s ability to pay the mortgage, for example by way of a loan-to-income and credit score test. This is certainly likely to constrain take up in the 90% to 95% LTV range.

The requirement that mortgages are on a capital repayment basis, is also likely to have a bearing on the affordability of home ownership for many prospective buyers and the ability to pass tests regarding their means to service a mortgage.

Impact on the market:

Taking all these constraints into account and assuming 35% of loans are accounted for by remortgaging, we estimate that a maximum of 320,000 house purchases could be facilitated by the mortgage guarantee element of Help to Buy over three years.

It is worth remembering that lenders have increased volumes under the NewBuy scheme, to a level of supported reservations consistent with around 2,000 sales per annum. It remains to be seen whether there is appetite for the much larger numbers envisaged under Help to Buy.

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