The government’s mortgage market review is nothing to fear – Bamford
Now, I’m pre-empting the recently announced review by a good few months, but when it does report back, I’m quite certain there will be nothing in it to fear, and we can hope it does have several suggestions to right some of the wrongs that appear inherent in our market, but need not be.
The Prime Minister, Boris Johnson, talked a lot about the housing and mortgage markets in his June speech, but what came clearly through is that this government is not backing away from the ‘first-time buyer first’ policy it, and previous governments have followed for over a decade.
You might consider ‘turning Generation Rent into Generation Buy’ a political soundbite but again, no one looking at what has happened over that timescale will think this hasn’t been the attempted focus already. Whether it has achieved success in this area is, as always, a moot point.
Improving high LTV access
But, clearly, one of the issues the government does want this mortgage market review to look at is around ongoing obstacles to home ownership for potential first-timers, and what can be done to ensure deposit levels are achieved and access to 95 per cent loan to value (LTV) mortgages.
As a business which has spent the past 25 years working at the sharp end of helping deliver high LTV lending through our lender clients, we are clearly going to be ready, willing and able to share our thoughts with the review on how the sector works, the risks associated with this type of lending, how to mitigate it, and what might work going forward.
Cushioning of insurance-led schemes
It was interesting in the Q&A session after Johnson’s speech, that one journalist brought up the use of mortgage insurance, citing the ‘Canadian model’. They asked whether the UK might look to implement this in order to get greater numbers of high LTV products, increased high LTV lending, and more lender engagement.
Johnson himself batted this off but it will be clear to those conducting the review that in many countries, including the UK, private mortgage insurance for high LTV loans is a natural part of the marketplace. It helps ensure those who require such loans have access to them, that lenders who offer them can mitigate the risk, and as a part of this, the pricing for such products is not completely out of kilter with what is offered at other LTV levels.
Indeed, there will be many within government and HM Treasury who are acutely aware of what such insurance guarantees can deliver, especially given it was a specific Help to Buy scheme for a while and the government’s Mortgage Guarantee scheme, which acted as an excellent catalyst for high LTV product growth when it was introduced early last year.
The point should however be made that the Guarantee Scheme will finish at the end of the year, that element of Help to Buy referred to above finished in 2016, and while we have excellent schemes like Deposit Unlock kicking into gear with more lenders on board, there is always going to be a space for alternatives. Or indeed, more of a government push to get more lenders utilising private mortgage insurance to offer these higher LTV loans.
Figuring it out
It is a somewhat odd space to currently be in, but I suspect there will be few mortgage market stakeholders who can’t identify exactly what the barriers to buying are for first-time buyers. They have been the same for some time, but certainly greater levels of high LTV mortgage lending, greater numbers of products, coupled with support to allow would-be borrowers to make the most of their savings, will help.
Add in greater levels of housing supply, specifically affordable homes and new-build homes – the latter of which are very popular with first-timers – and you move forward again. Drop in slight shifts in lender affordability, the removal of stress-testing, tweaks to criteria, and a greater willingness to see regular rental payments as indicative of a greater propensity to pay a mortgage, and we may open things up even further.
Any review of the obstacles tends to write itself – it will be putting in place the industry solutions that are readily available, which may take longer to get agreement on.
Mortgage advisers unite with view to lower barriers for first-time buyers
The group, working with Sesame Bankhall Group (SBG) and with contributions from the lenders Nationwide and Kensington, said the top three barriers facing today’s first-time buyers are raising a deposit, affordability pressures and a lack of suitable homes to buy.
Alex Beavis, proposition director – mortgages and later life, SBG, said: “Getting onto the housing ladder has always been difficult but this generation of first-time buyers is facing perhaps the toughest set of challenges yet. The end of Help to Buy, the spiraling cost-of-living, rapidly rising house prices and huge economic uncertainty have combined to create the perfect storm for a generation of aspiring homeowners.
“For a lot of young people out there, the idea of one day owning their own home has become a pipe dream. We need to work together to create positive change.”
The IPFA said in a statement that it was “imperative that we protect and increase the number of homes being built through the government’s affordable housing schemes, thereby maintaining choice for home-buyers seeking affordable solutions.”
It called for the establishment of an industry-wide campaign to raise awareness of Help to Buy alternatives, such as privately backed shared-equity schemes, and for those programs to be opened up to include people trying to buy homes other than new-builds.
Another suggestion was to tie equity release or retirement interest-only loans to a first-time buyer mortgage in a multi-generational scheme that could help buyers who can’t rely on the “bank of mom and dad” for their deposit. This would be a sort of rebranding of joint borrower sole proprietor loans combined with a push by mortgage advisers to raise awareness of such loans.
The group asked the industry, government and regulators to work together to consider different approaches to high loan to value (LTV) lending, such as split-term mortgages, as a way to help new buyers clear deposit and affordability hurdles. One example cited would see a 95 percent LTV offered for a 35-year term with the other five percent being a secured or unsecured loan over five years. After the first five years, the borrower would be able to remortgage onto a mainstream home loan, the IPFA suggested.
Finally, the group suggested exploring the idea of ‘low-start’ mortgages that combine capital and interest-only borrowing. Such loans could cover, it said, a 35-year mortgage term and reduce the portion on interest-only as the borrower’s earnings rose over time.
Stephanie Charman (pictured), head of strategic relationships, Sesame Bankhall Group, said that the problems facing first-time buyers were “complicated and varied, meaning we need fresh thinking.”
However, she added “to make that a reality, we need the buy-in from all stakeholders, including those from the advice industry, mortgage lenders, the government and regulators – and fast. This is simply too big a problem to tackle by any one party alone.”
Tipton and Coseley partners with Ahauz to support first-time buyers
The partnership will allow customers to access up to 25 per cent of their property value from Ahauz as a second charge mortgage, and Tipton will then offer a first charge mortgage at a lower loan to value (LTV).
This will allow customers to boost their homebuying budget. The companies said that with cost of living and house prices continuing to rise buyers were increasingly struggling to save a deposit and could be left out of the property market.
Ahauz launched in September and has said that it has seen “significant demand” for its products, especially for existing properties. It has also partnered with Promise Money.
Karthik Srivats, co-founder of Ahauz, said: “It’s fantastic to have such an established institution like the Tipton working alongside us to help a generation trapped in renting. We have been impressed on how Tipton perceives our equity loan and its potential to be scaled across all properties, not just new builds.”
He said that this was a “challenging year” for first-time buyers and it hoped more lenders followed Tipton’s suit in improving customer choice. He added that the team was looking forward to working with Tipton and Ahauz’s broker partners to help more customers.
Becky Wheeler, marketing and product manager of Tipton, said: “In an era of rising property prices and cost of living increases, it is ever harder for first-time buyers to raise a large deposit. At the Tipton, we are proud to support first time buyers and Ahauz’s equity loan proposition is a great partnership that helps us provide lending solutions for those looking to take their first steps on the property ladder.
“We look forward to working with the Ahauz team and our broker partners offering innovative solutions to first-time buyers.”
Johnson launches mortgage market review and confirms Right to Buy extension and benefit changes
In a speech given in Blackpool today, Prime Minister Boris Johnson said that 2.5 million tenants renting from housing associations would be given the opportunity to buy them outright.
He said the government would work with the housing association sector to design the scheme and it would also commit to building replacement homes for each one sold.
Johnson said: “Just as no generation should be locked out of home ownership because of when they were born, so nobody should be barred from that same dream simply because of where they live now.
“For four decades it has been possible for council home tenants to use a discount to buy the property they live in.”
He said that since its launch Right to Buy has helped two million people into homeownership and it had allowed people to be in “charge of their own family home, able to make improvements and add value as they please”.
First time buyers
Johnson added that the government would change rules so 1.5 million people who are in work but on housing benefit could use it towards a mortgage, rather than it going directly to a private landlord or housing association.
Johnson also confirmed that it would launch an “independent review of access to mortgage finance for first-time buyers” with the aim of widening access to low-cost, low-deposit finance.
He said that rising house prices, mortgage lending restrictions and high deposit requirements were limiting the number of young people that could buy a home. He pointed out that half of today’s renters could afford the monthly cost of a mortgage but only six per cent could secure a first-time buyer mortgage.
“First-time buyers are trying to hit a continually moving target. By the time they’ve put aside money to secure their mortgage, prices have risen and it’s no longer enough. And of course the global rise in the cost of living is only making life harder for savers.
“So we want it to be easier to get a mortgage. Reporting back this Autumn [the review] will look at how we can give our nation of aspiring homeowners better access to low-deposit mortgages,” he explained.
Levelling Up Secretary Michael Gove said that extending Right to Buy and launching a review of the mortgage market showed it was “backing first-time buyers, breaking down barriers to homeownership and delivering on the people’s priorities”.
He added that it would change rules to encourage those claiming Universal Credit to save for a deposit. Current rules mean that the amount of Universal Credit declines if someone’s savings exceed £6,000 and stop when the exceed £16,000.
Gove continued that it would make Lifetime ISAs exempt from these rules, so people could put aside a little each month for a deposit without impacting Universal Credit payments.
The government will also change the timeline for its support for mortgage interest loan, which aims a loan that helps claimants pay interest on mortgages, from nine months of unemployment to three months.
It said that this would “incentivise people to find work again and bring government into line with what lenders offer in these circumstances”.
Gove said that he would bring forward its commitment to deliver one million new homes by the end of this parliament.
Proposals fail to address supply and demand issues, industry says
Dan Wilson Craw, deputy director of Generation Rent, said that Johnson had “failed to set out action to deal with the unaffordable level of house prices and rents”.
“Neither the review of low-deposit mortgages, nor extending Right to Buy to housing associations will address the shortage of homes we need in places people most want to live. For that we need a programme of social house building beyond the one-to-one replacement of homes bought under Right to Buy,” he explained.
Wilson Craw said that expanding eligibility of Universal Credit to people saving towards a deposit would “restore some fairness to the benefits system” but there were more people with no savings struggling to find somewhere to live with current Local Housing Allowance rates.
He added that broadening housing benefit to cover mortgage payments was unlikely to help people currently receiving benefits to secure a mortgage as they would not pass lenders’ affordability tests.
Marc von Grundherr, director of Benham and Reeves, said that previous initiatives which permitted social tenants to purchase their properties had backfired and caused a significant shortage of stock which had driven up property prices.
He said the commitment to replace the stock might mitigate this but that the government’s track record on delivering homes was “woeful at best and social housing has long been an area of serious neglect”.
“To allow them to auction off existing housing association stock while also failing miserably to replace it would be a big mistake indeed,” added von Grundherr.
Councillor David Renard, housing spokesperson for the Local Government Association, said extending Right to Buy could help more on the housing ladder, but proposals should not lead to a fall in affordable social housing.
“Any houses sold must be replaced quickly, in the same local authority area and on a like for like basis. Equally, the cost of discounts must not be funded from the sale of council housing stock, nor be met from existing government funding commitments for delivery of additional affordable homes,” he said.
Renard said that the Right to Buy scheme for council tenants needed “urgent reform” and councils needed to be able to keep 100 per cent of receipts and set discounts locally.
“The number of new council homes being built is not able to keep pace with those sold under Right to Buy, and the discounts available, along with the funds that have to be returned to Treasury, are leaving councils with less and less resources to catch up,” he noted.
Benefits changes raises questions for lenders
Jeremy Leaf, north London estate agent and a former RICS residential chairman, said that he understood the logic of reducing the benefits bill, but this was dependent on housing prices continuing to rise rapidly.
He added: “The other point is that it relies on lenders taking on borrowers who are on benefits, as they are often the ones who are struggling not just with raising deposits but making repayments.
“They are often on lower salaries and struggling to make ends meet, so would lenders take them on from a commercial point of view without some sort of guarantee from the government that they will meet their repayments?”
Vikki Jefferies, proposition director at Primis, said that the plan to help lower-paid workers use housing benefit and make monthly payments should be “welcomed”.
“This kind of government intervention is vital in encouraging greater homeownership in the UK. With average rents rising by a further 1.1 per cent in May, this policy will also support those who are trapped paying large proportions of their pay packets on rent.
“However, while government action on affordability is encouraging, there is still a broader issue here – the lack of affordable housing stock. It will therefore be important to see if the government’s promise that each housing association property sold will be replaced by another actually comes to fruition,” she said.
Boris Johnson to extend Right to Buy and allow housing benefit for mortgage payments – reports
In a statement from Downing Street, the Government said Johnson would reaffirm in a speech in Lancashire today his “ambition to unlock the opportunity of home ownership for more people through helping those in a position to buy, to access the mortgage finance they need, ensuring people are incentivised to save for a deposit no matter their financial situation, and improving the supply of housing across the country”.
Media reports have suggested that this would include extending Right to Buy to housing association tenants.
Currently, Right to Buy allows most council tenants to purchase their council home at a discount if they meet certain criteria. This includes if it is their main home and self-contained, if they are secure tenants and have had a public sector landlord for three years.
A report from The Times suggested the maximum discount could be up to 70 per cent, but this was not confirmed by secretary of state for Levelling Up, Housing and Communities Michael Gove on LBC this morning.
The report also said that Gove had secured agreements with housing associations to replace every property sold with another to ensure social housing stock is maintained.
On LBC Gove said many people on in-work benefits were already paying significant sums in rent, and if this was converted into mortgage repayments then they would be able to “handsomely meet their mortgage repayments from their overall income”.
He added: “One of the things I want to do is extend home ownership across the country, and there’ll be many people in the North, the Midlands and the South West who will be well able to get on the property ladder using the amount they currently earn and receive in Universal Credit.”
According to the National Housing Federation, housing association provide homes and support for around six million people across England.
Another possible proposal would be allowing borrowers to use housing benefits to secure mortgages and make monthly payments.
Currently lender attitudes to benefit income are mixed, and are more cautious if it is the sole form of income or exceeds more than half of the would-be borrower’s total income.
According to Criteria Brian, 20 lenders will potentially accept income where it is primarily made up of benefits. This compares to 50 lenders who said they will not accept income which is mainly made up of benefits.
The latest statistics from the Department for Work and Pensions state that are around 2.6 million people are on housing benefit in the UK.
Reports also suggest that Johnson will launch a review of the mortgage market to explore ways to reduce the deposit needed by borrowers to secure a mortgage.
Proposals are ‘demand-sided’ and don’t address supply issues
Andrew Montlake, managing director of Coreco, said that the benefits proposal was “a bit strange and not sure lenders will like it”.
He said: “Using benefits, especially housing benefits or universal credit is not ideal to base a mortgage on and even if it is used it is unlikely to boost borrowing eligibility that much to make a big difference.”
He added that there were questions around eligibility, as borrowers circumstances could change and policy changes could alter eligibility.
“If someone is relying on it and it gets taken away or reduced then that is a risk if the mortgage then becomes unaffordable,” Montlake added.
He said the Right to Buy extension could help some but it was a “bold claim” to say that every household sold would be replaced as the government has failed to meet its housebuilding targets.
Montlake said a review of mortgage market to see if deposits could be reduced was “farcical” as borrowers could get a loan with five per cent deposit and reducing that could risk negative equity.
“All of these schemes seem to be demand sided that keeps the prices of properties high without addressing the real supply side issues. The government would be better off to nationalise a housebuilder and build their own affordable housing in places people want to buy or create new places complete with infrastructure that make it appealing.”
Chris Sykes, technical director at Private Finance, said that it was a “nice sentiment” but it was unclear as to how it would work.
He pointed out that to qualify for housing benefit you needed to have less than £16,000 in savings, so that would make raising a deposit challenging.
Sykes added: “Through the Right to Buy scheme you can use the discount as deposit it often isn’t enough as often it will be lower earners in the property so cannot mortgage as much as they’d hope.
“Then by nature of you being on housing benefit your other income will be low, so especially with the cost of living affecting lenders affordability those on lower income will have lower and lower borrowing capacity, lenders need there to be excesses in affordability and if you are living on the breadline then it is unlikely that you have the excess in affordability necessary, as well as the fact lenders generally use ONS data on expenditures, where those on benefits might have much below ONS spending averages due to where they shop, what they have to eat and so on.”
The Tipton partners with Even
Even’s proposition is modelled on the Help to Buy scheme, except it is only available on secondhand homes and there is no interest payable for the duration of the loan term.
Borrowers can now use an Even loan to boost their deposit then go to The Tipton for a first charge mortgage.
Even offers loans worth up to double that of a borrower’s deposit, up to a maximum of £100,000. It holds a share in the property it has offered a loan against at the point of repayment, and the value of this increases and decreases depending on price fluctuation.
There is a profit cap on Even’s share in a home.
James Turford, co-founder and COO of Even said: “Even is built for the 50 per cent of aspiring first-time buyers who don’t have access to the Bank of Mum and Dad. We’re thrilled to be partnering with Tipton, our first building society, and are impressed with how quickly they’ve moved to support our innovative product.
“We’re looking forward to offering more options for people to get into their first homes.”
Jason Newsway, sales and marketing director of The Tipton, said: “At the Tipton we’ve been enabling people to own their own home at all stages of life for 120 years, and we’re proud to be partnering with Even team to offer this innovative solution to our broker partners, helping the next generation of homebuyers onto the property ladder.”
BSLS2022: There could be lender ‘casualties’ due to funding costs
Speaking on a panel at the British Specialist Lending Senate, Generation Home’s chief commercial officer Graham McClelland (pictured) said there was “demand out there for mortgage paper” and “real interest from investors for mortgages”, especially in the specialist space.
“I’m sure that in time that funding will sort itself out, but there may well be short-term, or even long-term casualties,” he said.
One recent example in the specialist lending market has been Molo Finance, that had to temporarily suspend its buy-to-let products due to capital market uncertainty. The lender also had to change some existing mortgage offers and postpone certain completion dates.
Anth Mooney, chief executive of Vida Homeloans, said: “If non-bank lenders stand still and fail to diversify their funding models, then absolutely, I think there will be some casualties.”
Mooney said that for non-bank lenders the next 12 months’ funding costs would rise given the “level of uncertainty in the macroeconomic and political environment.”
He added that when setting its funding strategy, the key consideration was, and is, “ensuring certainty” for both customers and intermediary partners so that once a mortgage offer was issued they can have full confidence that it will be honoured.
“I can’t stand here with a straight face and say that funding markets will always be open, but what I can promise with 100 per cent certainty is that once a customer has a mortgage offer from us, they will always get their mortgage, because we always pre-fund our offer pipeline,” Mooney noted.
McClelland said that timing is very important when it comes to funding, adding that Generation Home had made a forward flow arrangement at the start of the year.
He said that the company, which was founded in 2019 and is focused on first-time buyers facing affordability and deposit challenges, has two main funding lines, one from a traditional private warehouse, and a forward flow arrangement that give it “plenty of runway.”
“The availability of funding and making sure that you have enough runway to support you when times get tough is always the critical thing. That’s what keeps you awake at night, but there is also an element of luck, particularly as a small lender,” McClelland added.
“It feels like we’re through the worst of that pain. We’re working really hard on finding supplemental forms of capital that are not deposit-based but are not necessarily market-linked. So, watch this space.”
McClelland continued that savings’ rates are also going up, so deposit-based funding was also more expensive, which he said should mean big lenders start to raise pricing for their products.
“Raising retail funding from a standing start is not particularly any cheaper than accessing the wholesale markets. It’s just that over time, it gives you a more stable, broader base, particularly if you’re looking to grow your business to a balance sheet of £5bn to £7bn, and that’s quite important.”
Mid-size banks are eyeing the specialist sector
Mooney said that big banks are currently “not servicing anything that falls outside of an automated process” and for mainstream lenders “to pivot to a more specialist lender model, which requires face-to-face solutions, open flexible dialogue with brokers and deep human underwriting expertise is really expensive.”
He added: “It is clear that some larger and mid-sized banks have aspirations to move into that near prime space, that grey area between specialist and prime, a market that is quite difficult to accurately size or define. But I don’t see the larger players having the appetite or expertise to expand beyond that into more specialist customer segments.”
McClelland said that what was happening in the rungs below the biggest banks was interesting, as they might start looking at the specialist space.
“If all you’ve got to compete on is price, but you know you’re going to lose, which is what’s been happening, what do they do? What do the bigger building societies do? And where did they go next?
“I think that’s quite interesting to see whether they can do it quick enough to keep up with the more nimble specialists,” he noted.
Rising swap rates will lead to price correction
McClelland added that previously if swap rates, which are integral to lender product pricing, had gone up by five basis points in a week that would be a “big deal”, whereas now they have continued to go up and up.
“I think this might be the first time in mortgage market history, certainly within decades, that the average the average product rate for a 75 per cent loan to value (LTV) mortgage was sub-swap rate. That means the big banks are out there lending money at a cheaper rate than it cost them to borrow in the market and this cannot be the most efficient use of their capital.”
He added that this was aided by having a “huge sticky base of customers that cost them next to nothing.”
Mooney predicts that mortgage pricing will continue to rise in the coming months, and that Vida has repriced some of its products due to increased funding costs.
“Some of the rates being offered in the market are unsustainable and we should expect to see a correction in both buy to let and residential mortgage pricing in the weeks ahead,” he said.
He added that forward swap rates were up by around 100 basis points since the start of the year, the prime market has responded with price increases of up to 70 to 80 basis points, whilst the specialist market has been slower to respond, with rates increasing by only 20 to 30 basis points so far.
Mooney continued that with ongoing talk of recession, there will also be discussions had across all mortgage lenders about credit risk appetite and the availability of mortgage credit, especially at higher LTVs.
“The current dislocation between forward swap rates and bank base rate is driven primarily by uncertainty. It’s uncertainty that kills markets and that uncertainty will therefore drive into a lenders appetite for risk,” he added.
Nearly half of deposit-ready FTBs lack mortgage knowledge – Nottingham BS
The Nottingham Building Society’s survey of 1,023 adults in the UK, including 160 who expect to buy their homes in the next five years, found 15 per cent knew nothing about mortgages and 31 per cent said they knew very little.
The understanding around the need for a sufficient deposit was acknowledged by respondents. Some seven per cent said they wanted to raise a deposit of 30 per cent of more, 21 per cent said they wanted their deposit to cover a fifth of their potential property’s value and 36 per cent aimed to raise a deposit of at least 10 per cent.
Only 13 per cent of respondents said they were aiming for a five per cent deposit.
According to the poll, eight per cent of respondents have at least £50,000 saved while 13 per cent have between £20,000 and £50,000.
Almost a third have saved up to £999 so far and 48 per cent have accumulated between £1,000 and £20,000.
When arranging a mortgage, 18 per cent said they would only consider going to their main bank or building society. Around 38 per cent of respondents said they will use a whole of market mortgage broker and 31 per cent said they planned to use an adviser who was recommended to them.
Iain Kirkpatrick, chief customer officer at The Nottingham, said: “It’s encouraging to see that so many of those planning to buy their first home understand the importance of having a healthy deposit.
“However, it is concerning to see so many admit they don’t know enough about mortgages generally, and how to find the best deal. Seeking independent advice from an expert adviser can be the key to understanding more and could also save thousands of pounds in repayments.”
Consultations and cost of living; the opposing forces on affordability – Toumadj
Across the mortgage community, the ruling is expected to pass, after which lenders will have the freedom to set their own reasonable rate.
BoE estimates that this change will allow six per cent of borrowers to get the loan they wanted. This could also open the door for a more bespoke data-driven approach to affordability that takes into account the fact that buyers are unique.
However, there remains a question about whether the regulator should review its loan-to-income (LTI) flow cap, which currently stands at 15 per cent at or above 4.5 times LTI.
Habito and Perenna have already made a statement to say the current limit is not ‘fit for purpose’ and it’s likely that other organisations will also call for more action.
There is definitely borrower-led demand as 40 per cent of Mortgage Broker Tools (MBT) searches are for an LTI of 4.5 or greater. At the moment, a borrower looking to buy a £250,000 home, with a 15 per cent deposit and a salary of £35,000, needs an LTI of 6.1.
Cost of living risk
These may be positive signs, but they are being offset by the increased cost of living, which will lower borrower’s affordability and will have a disproportionate impact on lower earners, who will struggle the most to buy their own home. We will see this impact feed into lender’s affordability calculations over the next few months as Office for National Statistics (ONS) expenditure figures are updated.
Whatever the income bracket, everyone is facing skyrocketing bills and the complications that come along with an inflation rate of seven per cent year-on-year as of March 2022, which the BoE has described this as “uncomfortably high”.
ONS data from March reveals 23 per cent of UK adults found it difficult to pay household bills. For renters, who skew largely towards lower income brackets, this figure increased to 37 per cent.
The treatment of rent payments is actually one way that could be used to ease the mortgage affordability squeeze. At the moment, there are millions of potential first-time buyers who clearly demonstrate that they can afford to pay rent every month, often at a higher price point than a mortgage would be, but who are excluded by current affordability calculations.
We need more data and analysis in order to fully understand the issue and ensure affordability works for renters – something which MBT is actively working on as we speak.
Affordability is all a matter of balance.
For example, we need to make the most of modern technology, and the incredible granular data analysis it is able to provide. But we also need to remember that these algorithms can only be as good as the data that is included, and so the addition of something like rental payments can only help to improve the outcomes.
In general, the market as a whole must strike a delicate balance between making affordability rules more flexible, while also protecting borrowers and the wider UK economy by making sure to lend responsibly.
Help to Buy completions drop 41 per cent on pre-pandemic levels
According to figures from the Department for Levelling Up, Housing and Communities (DLUHC), the scheme has supported the purchase of properties worth £2.5bn. The equity loans issued during the period totalled £604m.
The scheme was revised in April last year, restricting the use of Help to Buy to first-time buyers only and regional price caps were introduced.
The DLUHC said the price restrictions contributed to the reduction in completions across all regions except London where the limit was maintained at £600,000.
Rhys Schofield, managing director at Peak Mortgages and Protection: “It’s unsurprising that numbers are a bit down on 2019 as we’ve had regional price caps introduced since then and those are really starting to bite in some parts of the country. House price rises in some areas have outstripped the cap.
“With house prices growing at, say, 10 per cent a year the government is doing very well out of the scheme, too. Their value of the share they have in people’s homes has also gone through the roof.”
The East of England and the South East saw some of the sharpest drops in completions following the new version of the scheme. The East of England reported a decline from 2,104 in Q1 2021 to 1,530 in Q2, while the South East reported a fall from 3,059 in Q1 to 2,303 in Q2.
In London, the quarterly declines were not as severe with completions exceeding 1,000 in Q1, Q2 and Q4.
Compared to Q3 2021, overall completions in Q4 were up by 22 per cent.
Property price and type
Price caps also inevitably reduced the average value of properties purchased through the Help to Buy scheme.
Compared to Q1 2021, the last full quarter of the previous scheme, the mean property price was down in all regions in Q4. The largest decrease was in the North East and North West, where the mean property price reduced by 30 per cent and 27 per cent to £161,842 and £190,867 respectively.
The overall average value of homes purchased through the scheme in England fell from £329,254 in Q1 to £285,293 in Q4.
Compared to previous years, 2021’s Q4 average value was down on 2020’s £320,811 and 2019’s £300,534.
Across the whole of 2021, the average value of a home purchased using Help to Buy came to £305,669.
There was a lower proportion of four or more bedroom properties sold under the current Help to Buy scheme, which the DLUHC said was expected due to the lower proportion of detached properties purchased.
Some eight per cent of properties sold had four or more bedrooms compared to 28 per cent under the scheme in 2016.
Meanwhile, the proportion of two-bedroom properties purchased rose to 32 per cent under the current scheme compared to 22 per cent under the previous scheme.
Deposit and income
The average household income for those using Help to Buy in Q4 2021 was £54,309, up from £53,831 in Q3.
For London-based purchasers, this was pegged at £68,245 in Q4 up from £67,108 in Q3. For buyers in England excluding London, this was nearer to the overall England average, with typical household incomes of £51,972, almost flat on £51,330 in Q3.
Compared to previous years, the overall average household income was higher in Q4 2020 at £61,874 and in 2019 was £57,570.
In total, the average income for those using Help to Buy in 2021 came to £58,169, down on £60,781 in 2020.
The average deposit percentage for the new version of the scheme was lower than the previous version across all regions. The DLUHC said this suggested Help to Buy was being used by more people who had smaller savings.
Additionally, the size of the deposit has fallen compared to the older version of the scheme.
For example, buyers in the South West put down an average 10 per cent deposit in Q1 last year, equivalent to £31,813, but in Q4 this dropped to a nine per cent deposit worth £22,106.
In the North East, this fell from an eight per cent deposit worth £20,539 in Q1 to a seven per cent deposit worth £11,386 in Q4.
London saw the smallest difference, likely due to the maintained price cap, with an average deposit percentage of nine per cent worth £41,256 in Q1 2021, to nine per cent in Q4 worth £40,275.
Stuart Powell, managing director of Ocean Mortgages, said homebuyers were being more creative with deposit raising.
He added: “Rather than entering a government-run scheme that shares in the growth of their property value, buyers are turning to ‘The Bank of Mum and Dad’, or ‘Nan and Grandad’ to fund their deposits. During 2021 and the first quarter of 2022, equity release experienced a growth boom, a significant portion of which was used for house deposits. This has become a viable alternative to Help to Buy and partly explains the reduction in Help to Buy loans.”
Government and developers reaping gains
From the scheme’s introduction in 1 April 2013 to 31 December 2021, 355,634 properties have been bought with a Help to Buy equity loan.
The total value of these equity loans so far totals £22bn while the value of properties stands at £99bn.
Paul Neal, equity release and mortgage adviser at Missing Element Mortgage Services, said it would be interesting to see the change in the value of loan repayments.
He added: “I had a client this week who originally borrowed £36,000 through the scheme and over the past five years their property’s value has increased and now they have to pay back £48,000. That’s £12,000 over a five-year period. Now, times that by 355,634 properties and that will fund a lot of parties in Downing Street in the coming years.”
Lewis Shaw, founder of Shaw Financial Services, added: “With rates rising, incomes stagnating, and a lot of Help To Buy loans maturing this year, and for the next couple, many borrowers could find they aren’t in a position to remortgage and pay off the government loan. This will mean one of two things: either sell up and move somewhere else or get stuck paying interest on the Help to Buy element until they can repay that debt.
“The only people that have really benefitted are developers and their shareholders in bumper dividend payouts and the government who have piggy-backed on soaring property prices rises which they engineered themselves. Or maybe I’m just too cynical.”