Figures from the Bank of England showed that mortgage approvals hit a five year high last month, as the recovery in the housing market continued to gather speed.
Just one day after the Government brought forward the launch of its subsidised mortgage scheme – Help to Buy 2 – official figures showed that banks and building societies approved 62,226 mortgages in August – the highest since February 2008.
In total, £15.6 billion was agreed, the highest commitment since June 2008.
Signs of a resurgent housing market will no doubt renew questions over Help to Buy 2, which will see £12 billion of taxpayer guarantees, used to support £130 billion of low deposit mortgage lending. Critics, including the business secretary Vince Cable, have warned that it may cause a bubble and that the policy is no longer necessary given the market’s recovery.
The scheme is now expected to be launched this month rather than January 2014. It has been revealed that the state backed lenders, Royal Bank of Scotland and Lloyds Banking Group have signed up to the scheme.
Help to Buy 2 will initially be available under the Natwest, RBS and Halifax brands, but other banks are expected to take part over time.
The scheme will help people buy a home worth up to £600,000 with just a 5 per cent deposit. The Government will guarantee the next 15 per cent of the loan for a fee. This will ultimately reduce the bank’s potential losses enabling them to offer cheaper mortgages to the higher risk customers who are currently locked out of the market.
What rates can be expected under Help to Buy 2? This is still unknown as the lenders involved have yet to decide their interest rate offerings. Experts predict rates of between 4.5 per cent and five per cent for a two year fixed rate at and 80 per cent per cent t loan to value.
What are the key differences between Help to Buy 1 and 2? Help to Buy 1 allows people taking their first step on the property ladder to borrow up to 20 per cent of the value of their new build home from the Government. This is borrowed on an interest free basis for the first five years.
Borrowers need a five per cent deposit and must take out a mortgage to cover the remaining 75 per cent of the cost of the property. After the five year interest free period ends, borrowers will be charged a fee of 1.75 per cent of the loan’s value. This fee will increase every year at one per cent above inflation.
These fees only count toward the Government loan and come on top of the mortgage repayments. Borrowers must pay back the equity loan when they sell the home or at the end of the mortgage period – whichever comes first.
Help to Buy 2 will be available to both first time buyers and existing home owners, buying new build and older properties. Borrowers will need a five per cent deposit while the lender will be able to buy a guarantee from the Government covering up to 15 per cent of the value of the property. This will make it less risky for lenders to offer a mortgage to a borrower with only a 5 per cent deposit. It should also enable them to offer cheaper rates. Both phases of the scheme are available on properties worth up to £600,000.
Is this scheme necessary when house prices are rising across the UK?
Recent figures from Nationwide Building Society showed that all thirteen UK regions saw annual house price growth in the third quarter, with the average property now rising in price by five per cent per year. This is expected to continue in the coming months as more people have access to mortgages, which will further stimulate the market.
Some critics say that Help to Buy is artificially pushing up house prices and could cause the next housing bubble.
The Prime Minister commented that two people earning £25,000 each who want to buy a £200,000 home would need to save a £40,000 deposit on average. He went on to say that if the scheme were not launched, it will only be people with rich parents who can get on the housing ladder. It will be interesting to see how many lenders sign up to the scheme and how quickly the Government’s £12 billion pot runs out.
* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.
* Email: email@example.com