New Mortgages Scheme

THE government this week tried to revive the housing market with a raft of measures including underwriting mortgages of 95%.

It is general rule of thumb that every £1 spent on construction adds £2 to the economy so it’s a much better use of government funds than say, paying consultants at the MoD. 

Good news for the banks as their risk is minimised, and for the developers whose would be customers are currently unable to get finance.

But what about the buyers?

The mortgages will be available on new build properties only but you don’t just have to be a first time buyer. You can be a mover upper if you have the 5% deposit and fancy a brand new property.

The way it works is that on completion of the deal the developer puts 3.5% of the value of the property in a fund that the lender will hold for seven years and on which interest is payable.

The government backs this up with an additional guarantee of 5.5% of the property value that can be called on if the buyer defaults and the loss is more than 3.5%.

Housing minister Grant Shapps told the Commons on Monday night that all the major lenders are on board with the idea and little wonder really because if everything goes pear shaped the fall out goes something like this.

The buyer loses their 5% deposit and the property.

The developer loses their stake

The government - that is the tax payer - lose theirs.

The bank gets the house.

While there is absolutely no doubt that a lack of mortgage finance is crippling the market right now critics point out that this scheme will only benefit the new homes industry rather than the market as a whole and will do nothing to help people stuck in a chain.

Estate agents aren’t wildly excited about it either as first time buyers will undoubtedly be more tempted by a new build than the traditional terrace starter home or a two to three year old property.

It is also yet another ‘initiative’ to add to consumer confusion.

Hollie Reynolds is the engaging and sensible sales and marketing director for ISIS at Islington Wharf in Ancoats. As a developer ISIS would no doubt benefit from 95% mortgages underwritten by the tax payer but she has her doubts.

She said: “A lot of these schemes look good on paper but don’t deliver. And I cannot understand why they have chosen this route rather than expanding Shared Equity which is a brilliant scheme that buyers were just beginning to understand.”

Under shared equity the developer and the government combine to provide a 20% interest free loan for 10 years and the buyer again only has to find a 5% deposit. Crucially this means they only have a mortgage of 75% rather than 95% which means interest rates are lower.

Hollie said: “A lot of developers do their own shared equity schemes but the banks are happier if the government is involved and personally I think that should have been the way forward.

“But at least the Coalition recognises that people need help and it will be interesting to see what happens.”

An enthusiastic supporter of the government backed mortgages is Stuart Law of Manchester based property investment company Assetz who revealed he had been in discussions with big developers like Barratts earlier this year about just such a scheme and was approached by the Treasury.

He said: “I gave them the model and all the figures and what I am most impressed with is that they have actually gone ahead and made it happen.

“The cash contribution from the developers is considerably lower than when we were in discussions and 3.4% is a fantastic figure for them.

“And the banks are very, very happy with this as they have a government guarantee behind them. 

“And because they are not over-gearing then it does not trigger any of the new financial rules that are now in place.”

The financial rules designed to make sure we don’t have the same problems that caused this mess in the first place you mean?

He goes on: “The only person not happy is going to be the tax payer if the government ends up losing money.  And I think they will insure against that. I think they will bundle up the loans and insure against any loss rather than actually put in 5.5%.”

Bundles. Loans. Insurance. Losses.

It all sounds a bit sub-prime to me.

He counters: "We are talking about providing mortgages to high quality buyers who can more than afford monthly mortgage repayments but who are simply struggling to save the much larger deposits now required, so I expect the risk to taxpayer's cash to be very small.

 "The enormous benefits to the wider economy will far outweigh the negligible risk of mortgage defaults, and the announcement of the £400 million investment fund to support development could be the kick start we need to start building our way out of this recession."

It is general rule of thumb that every £1 spent on construction adds £2 to the economy so it’s a much better use of government funds than say, paying consultants at the MoD. And with the number of new houses built last year at the lowest levels since the 1920s something needs to be done.

People do aspire to own their own home and Stephen Porter, chief executive of Great Places Housing Group thinks the new indemnity mortgages are a good idea to get people onto the ladder.

He said: “Our affordable sales division Plumlife has helped thousands of people buy a new home through government schemes like Shared Ownership and FirstBuy and interest is sky high.

 “However availability of mortgages to those without a large deposit is a massive problem. People often can’t get past the first hurdle.

 “Lenders want deposits that are out of reach of most first-time buyers so anything that helps people clear this hurdle is a positive thing for the housing market.”

As for the right to buy measures, this would mainly only be available for properties that were part of a stock transfer from the local council, and it would only be for residents who lived in the properties at the time of the transfer.

 He revealed: “We currently experience virtually no interest in right to buy from those 2000 tenants and would not expect a huge surge in interest even with the suggested increased discounts.

“I understand the government desire to replace right to buys on a one for one basis with new affordable rented housing, but even at higher rent levels, I’m not at all sure it will be achievable from sales of modestly priced northern properties.

 “A number of the initiatives announced are welcomed and much needed even though some, such as the new homes bonus, are likely to favour the south of England more than the north.  We are still hoping to see, as soon as possible, more government investment to further increase the supply of affordable rented property across the north of England.”

 And while the focus was on Mr Cameron and Mr Clegg striding round a Linden Homes site in Guildford, Surrey, a little piece of property news got overlooked.

According to the online property website Rightmove the average asking price of a property coming to market fell by £7,528 (-3.1%) last month, the largest monetary fall since December 2007 and the third largest percentage fall on record.

Which has probably done more to help first time buyers than anything announced by the government.