Experts fear that when the Help to Buy scheme ends in 2020, house hunters will be unable to afford to buy a new-build flat which typically requires a 25% deposit from the borrower.
The market for 90 to 95% LTV new-build flats and houses is woefully underserved, said Helen Pierson, head of business development, Mortgage Bureau.
“The LTV differential between new-build and second hand purchases is outdated and requires a complete overhaul,” she said. “And for apartments, it’s even worse. Lenders need to bring LTVs into line.”
Products at record highs
Recent data released by Mortgage Brain showed 5,172 products had been added to the market since the end of June 2015, with product numbers, to date, rising to a new high of 9,973.
For borrowers looking for a new-build flat with a 5% deposit, there are only 16 products available in the market. For new-build house hunters there are 24. The situation improves slightly for those with a 10% deposit, with product numbers increasing to 41 in both categories. At 80% LTV, product numbers rise to 57 for flats and 61 for houses.
Demand for new-build flats is stable, said Pierson. She said they were good properties to downsize to, more affordable to those living alone, or people getting divorced.
Pierson said that Halifax and a handful of building societies were supportive of the new-build market but the mutuals’ affordability calculations were far from generous, which posed another problem.
Adrian MacDiarmid, head of mortgage lender relations, Barratt Homes, said the lack of new-build lender support in the higher LTV brackets restricted the market developers could sell to therefore affecting the number of apartments being built.
In 2008, 49% of homes built by Barratt were apartments. By the end of the financial year in June 2016, this had fallen to 19%. This included properties in London.
“While we would not consider that the 50/50 split from 2008 is appropriate today, it seems reasonable to assume that building more flats than we currently do would assist the first-time buyer, who might struggle to buy a house – and the amount of flats we build has been constrained by lending criteria,” he said.
He added: “In a market where affordability is stretched, flats are a great option for first-time buyers. We are not able to serve it well, because most lenders require a 75% deposit.”
Past holding back innovation
MacDiarmid said house builders had been working with lenders for the last nine years to address issues of the past.
“Many lenders’ current risk models are based on historic data which is pre-MMR , before detailed affordability checking and before the sophisticated credit scoring and data collection that is available today. Their risk models are also not taking into account the introduction of the CML’s Disclosure of Incentives form which guarantees lenders transparency of the transaction- and their security is a quality product.
“In light of these improvements, 75% or 80% LTV does not feel like it is relevant to the actual risk of lending on a new flat today.”
Pierson said that lenders should begin building up a track record in the 90-plus LTV market now, so they are prepared to support new-build lending sufficiently, when Help to Buy is withdrawn.
“It is not the case, that a lower deposit means a greater chance the borrower will default on the loan,” she said.
“Lenders like to see a track record in a market before they enter into it. They must act now to begin building up that data. They can’t wait for Help to Buy to end.”