That came out of left field. We have all been seeking dramatic intervention in the housing market from the Government and here in one fell swoop comes the Help to Buy Equity Scheme with up to 20 per cent equity participation to help second-time buyers, as well as new buyers and with a limit of £600,000 and no salary cap.
The big drawback is it remains restricted to new build so introducing further price inflation differentials favouring developers but disadvantaging the buyers and owners of existing stock.
To an extent this is relieved by the second element, the mortgage guarantee scheme which in essence compensates for the lack of a proper indemnity market and will cover both non new build and importantly remortgages as long as you switch lender. This is, however, deferred by a year.
But it is the equity scheme that has the most appeal for any number of reasons. Due to launch next month and cautioned by our awaiting as ever the real detail, this looks set to dominate financing in the new build market if it is everything Osborne has promised.
At the limit, a buyer of a £600,000 property at 75 per cent LTV will save over £300 per month in repayments from the Government providing a £120,000 interest free element, and that’s without adding in the saving in interest rate by borrowing at 75 per cent rather than 95 per cent.
Of course the cost is measured in the equity participation on sale and we all remember the dangers of historic open market equity participation schemes where the equity part was levered up. The loan will be interest free for five years, before the extra charges kick in (borrowers will then be charged 1.75 per cent, a figure which rises by RPI plus 1 per cent each year).
That’s why I believe the opportunity will be leapt upon by young professionals in London and other expensive areas. The £600,000 limit will buy a two bed flat in some pretty attractive areas of London, their initial costs will be far lower and critically they are on rapidly increasing salary structures which should enable them to cope with the cost of buying out the Government when they sell. Naturally it has considerable merits elsewhere as well but this is the market that will really benefit. And it starts in April this year.
Of course there are concerns, not least the risk of developer lead price inflation and this needs controlling by the scheme values. We wait to see which lenders sign up for the scheme outside the participants in the existing First Buy scheme and whether from a pricing perspective they treat these loans pari passu with conventional 75 per cent loans.
Operationally, First Buy was like navigating in fog so I trust there will be some streamlining and no double underwriting by both lender and whoever manages the Government element. There is also the exit risk. It’s fine if the property goes up in value and if so your personal circumstances mean you can afford to buy out your equity but for those not so fortunate there is a real risk of being locked into the property and not being able to move because you simply cannot afford to buy yourself out.
But let’s assume there are no snags in the detail. This package of initiatives really could deliver a fresh start to the housing market and enable many of those who never thought they would make their first step on the ladder to get going. And it may be a way out of jail for first time buyers unable to move. We just need a few lenders being innovative in finding smart ways to transfer negative equity into the new scheme.
Mark Chilton is chief executive of MAC Consulting