At the Council of Mortgage Lenders’ annual lunch earlier this month, former Treasury financial secretary Sajid Javid told the industry that the Government had an exit plan in place to avoid a “cliff edge” ending to the Help to Buy mortgage guarantee scheme.
Javid, who has since been promoted to culture secretary following Maria Miller’s resignation in the wake of the expenses scandal, told delegates: “We have always been
absolutely clear that this is a three-year scheme but I am aware that some in the industry, including the CML, are concerned about the end of the scheme creating something of a ‘cliff edge’.
“We do understand these concerns but there are mechanisms to adjust the scheme parameters, which we are confident will help to smooth the transition, and we will make a judgement about how best to use those flexibilities according to the market conditions at that time.”
He did not elaborate on what the “mechanisms” were. When Money Marketing asked the Treasury if it could provide further clarity on what Javid had referred to, a spokesman said it was in discussions about several options for ending the scheme and no exit strategy was yet in place.
Lentune Mortgage Consultancy managing director Stuart Gregory highlights the press coverage about the potential for Help to Buy to lead to a house price bubble in certain parts of the country.
He says: “The Treasury needs to do something to really calm that down a bit. In reality, there are so many elements to how a bubble comes about but Help to Buy is being pushed as the primary cause of rising house prices and clearly Sajid Javid was looking to ease that speculation.”
CML director general Paul Smee told a Treasury select committee hearing in December that the mortgage guarantee scheme, Help To Buy 2, should be terminated within three years. Help to Buy 1, which relates to new-builds, has been extended until 2020 but Help to Buy 2 is due to end as planned in 2016.
Smee also made suggestions about how the scheme could be ended smoothly. He said the Government could increase the cost of the guarantee, which would lead to a decline in the number of lenders offering Help to Buy products.
Alternatively, the maximum loan-to-value or maximum loan size available to Help to Buy borrowers could be lowered, immediately cutting the number of people who are eligible for the loans.
London & Country associate direc-tor of communications David Hollingworth says: “The exit route depends on what the Government is trying to achieve. If it is worried that the scheme is helping to create a bubble, that is different from how it exits from the giving of the guarantee.
“If it is to do with bubble fears, we could see a reduction in the maximum loan size that can be taken. That does not necessarily mean we end up with different rules for different postcodes but at least a reduction in the maximum loan size lends itself more to helping the regions than the capital, which is obviously experiencing rapid increases.”
But Hollingworth does not think that is the most likely option.
He says: “I imagine that the private mortgage guarantee sector will take on a lot of the burden that is currently borne by taxpayers. These companies have massive experience in this field. It is their day-to-day business and that would surely be the favourable situation. Lenders retain the option of having the guarantee but the role of the Government is removed.
“I would be amazed if that sector had not been lobbying the Government since before the scheme was introduced.”
John Charcol senior technical manager Ray Boulger says: “The fact that the Treasury has not provided details around an exit strategy suggests there probably is not much of
a strategy at all.
“Having said that, the exit route is so obvious that I do not know why Javid could not have said something. Clearly the best option is to increase the take-up of private sector mortgage insurance.”
Boulger says part of the reason why lenders did not take up private sector mortgage guarantees prior to Help to Buy 2 was the prevailing poor economic conditions and the
wider mortgage market crash.
But he says the main factor in the lack of take-up of private guarantees relates to capital requirements.
European rules state that lenders must hold a greater amount of capital for high-LTV loans. But under Help to Buy 2, the UK Government reduced the amount of capital
required for such loans, which is called capital relief. In October, capital relief was also made available to private mortgage insurers.
Boulger says: “The capital relief element is absolutely critical to why lenders were not inclined to provide high-LTV loans.
“Prior to Help to Buy 2, the private sector mortgage insurers got no capital relief, but that is no longer the case. Therefore, that gives the Government a very easy exit route.”
Trinity Financial product and communications manager Aaron Strutt says: “The best option would be to open discussions between the Government and the private mortgage guarantee sector.
“If the capital relief rules that currently apply continue after the closure of Help to Buy, lenders can still obtain the high-LTV loan guarantees if they want to. It should be that simple.”
Routes to ending Help to Buy 2
Gradual increase in the cost of the guarantee
If the cost of the Government’s mortgage guarantee is raised, lenders will be less inclined to offer mortgages through Help to Buy 2.
Lower the maximum loan to value
The maximum LTV available under the H2B 2 scheme is 95 per cent. By lowering this figure, the number of borrowers financially able to take up the guarantee would fall.
Reduce the maximum loan size
The maximum loan size under the scheme is £600,000. Lowering this amount would cut the number of properties available, especially in areas with higher house prices such as London and the South-east.
Transfer to private mortgage insurance
By working with private mortgage indemnity providers, the Government could ease the burden on taxpayers while retaining the availability of indemnity guarantees through the private sector.