Low loan-to-value ratios on mortgages coupled with high restrictions on lending have made moving pretty much impossible for a lot of us, and as a result the recovery of the property market has been an unnecessarily slow one. However, it looks like things are going to change for the better as John Elliott, Managing Director of Millwood Designer Homes, explains:
“Despite the restrictions on lending, the property market has still been growing, albeit slowly, for some time now but it shouldn’t be this hard. Unsurprisingly, the Government has been under a lot of pressure to look into ways in which they can help to get Britain moving again. So from a property perspective, the latest budget report has been the best we have had for years.
“Since the financial crisis began, first-time buyers have been hit with incredibly high deposits and, unless the bank of mum and dad was able to help, home ownership really has just been a dream for so many. At the other end of the scale, homeowners have found themselves trapped in their existing properties, unable to take that next step up the ladder.
“Help is at hand though in the form of a £3.5bn investment in Government loans to financially-stretched homebuyers and a £12bn scheme to increase the availability of mortgages to people who can’t afford a large deposit.
“Launched by George Osbourne, Help to Buy is an expansion of an existing scheme called First Buy, which went live in 2011 and was designed to help first-time buyers into home ownership in a way they can afford.
“However the new version, which will run from 1st April for three years, is not just available to first-time buyers. It is also open to those looking to move up the housing ladder as well. In addition, it has fewer restrictions than First Buy; the maximum property price that will be considered is £600,000 and there is no cap on the maximum amount someone can earn to be eligible.
“So how does it work? If you are looking to purchase a newly-built home, you will be able to take out a mortgage for just 75% of the cost of the property with only a 5% deposit. You will receive an equity loan worth up to 20% of the value of the property, which will be funded by the Government and will be interest-free for the first five years.
“After the first five years, an annual fee of 1.75% will be levied on the Government loan, and this fee will then rise annually by retail prices index (RPI) inflation plus 1% after that. The equity loan can be repaid at any time, or on the sale of the property.
“There is another part to the Help to Buy initiative – an introduction of a new mortgage guarantee. Its aim is to enable more people to obtain a home loan without the need for a large deposit and will run for three years from January 2014. It will be available to home movers as well as first-time-buyers, and on both new-build homes and existing properties worth up to £600,000.
“Low loan-to-values, or LTVs, on mortgages have prevented many thousands of potential buyers from moving or getting on to the first rung of the ladder. The LTV is the maximum the mortgage company will lend someone who wants a particular home loan, expressed as a percentage of the value of the property. Unfortunately, most of the lowest interest rates on mortgages are only available if you have a hefty deposit of around 40%, so that’s only 60% LTV. For those with smaller deposits and a higher LTV requirement, if you were lucky enough to secure a mortgage then you would be looking at a much more expensive deal with a much higher interest rate.
“However, this new scheme is encouraging all that to change as the Government will give lenders who offer mortgages to people with a deposit of between 5% and 20% the chance to buy a guarantee on the high LTV portion of the mortgage. That means if a borrower’s property were repossessed, the Government would cover a chunk of the losses suffered by the lender.
“In his budget speech, the Chancellor said he wanted hard-working people to ‘fulfil the dream of home ownership’ and I think the new initiatives are going to give the property market a serious kickstart. One crucial aspect is that the Government will not put the taxpayer at risk by letting people borrow more than the value of their property, so there is no chance of a return to the days of 125% mortgages.
“The reality is that people just can’t afford 25 to 30% deposits which means they have no chance of buying or moving, so the whole housing market grinds to a virtual halt.
“The property market needs this right now – we all need this right now – because it means that people will finally have a chance to afford the mortgage they need and the property market can get moving again. This will greatly benefit the country’s economy, and help to bring back the beginnings of a ‘feel good factor’.”