The Chancellor of the Exchequer (Mr George Osborne)
The Government are committed to supporting people who aspire to become homeowners. Since the financial crisis, increased deposit requirements and falling equity values have left many hardworking households unable to get on to the housing ladder or trapped in homes unsuited to their aspirations and needs. This has particularly impacted first-time buyers, who have found it increasingly difficult to purchase their own home.
The Government have today published final scheme rules and a commercial fee for the Help to Buy: mortgage guarantee scheme, which was announced at Budget 2013. The Help to Buy: mortgage guarantee has been designed to increase the availability of high loan to value mortgages to borrowers who are able to afford the monthly repayments but who are unable to save the large deposits required by lenders since the financial crisis.
The publication of the final scheme rules enables lenders to sign up to the scheme three months earlier than planned and start offering mortgages under the scheme. As a result, a number of lenders will begin offering high loan to value mortgages to borrowers. These mortgages will be entered into the scheme in January. In the coming months, the Government expect more lenders to sign up.
The Help to Buy: mortgage guarantee scheme is open to all lenders with permission to enter into regulated mortgage contracts in the UK. The scheme rules set out the eligibility criteria that a lender will need to apply to every loan they wish to place within the scheme. Both new and existing properties are eligible, but in order to be eligible the loan must:
be on a property in the UK;
be on a property with a purchase price of £600,000 or less;
be a residential mortgage, and not buy-to-let;
be a repayment mortgage, not interest only;
be for the buyer’s only property (i.e. it cannot be used for second homes);
not be used as part of a shared equity or ownership scheme;
not be subject to another guarantee (whether provided by the Government or by anyone else).
The scheme rules also contain safeguards to ensure that lending under the scheme is responsible. For each loan, participating lenders will need to demonstrate that the borrower was subject to an affordability test, that the loan will remain affordable if there is a rise in the interest-rate, and that the lender has verified the borrower’s income. For each loan the lender will also need to be able to demonstrate that the borrower was not “credit impaired” (using the definition from the Financial Conduct Authority).
These safeguards on responsible lending are complemented by other features of the scheme which ensure that the taxpayer is protected. If a lender chooses to participate in a given category of lending, they will be required to put all eligible loans that they originate in that category into the scheme. There are nine categories in total, with participation in each LTV band (80-85%, 85-90% and 90-95% LTV) split into three categories depending on whether the lender chooses to participate for loans for new house purchase only, or also for different types of remortgage transaction. This approach, whereby all eligible loans must be put into the scheme, ensures that lenders cannot only use the scheme for their riskiest loans.
The Government have also today published the fee that lenders participating in the scheme in 2014 will pay when purchasing a guarantee. The fee charged to lenders will differ depending on the loan to value of the mortgage. As set out in the scheme outline document published alongside the Budget, the fee has been calculated so that the scheme is self-financing and adheres to European Commission guidance on state aid. The fee therefore contains three elements: administration cost, cost of capital and expected losses. The fee will be reset on an annual basis to take account of any changes in the macro-economic forecast and using data on mortgages already guaranteed under the scheme. Lenders will be given the final fee for the following year three months in advance. The fee levels for 2014, which will be charged as a percentage of the original loan balance, will be:
90 basis points for loans with a loan to value of more than 90% and less than or equal to 95%;
46 basis points for loans with a loan to value of more than 85% and less than or equal to 90%;
28 basis points for loans with a loan to value of at least 80% and less than or equal to 85%.
To ensure the ongoing stability of the UK housing market, the Government have built a role into the scheme for the Financial Policy Committee (FPC). The Chancellor has asked the FPC to work with him every September, starting in 2014, to assess the ongoing impact of the Help to Buy scheme. Following that annual assessment he has proposed that the FPC advise him on whether the key parameters of the scheme—the house price cap and the fee charged to lenders—remain appropriate. At the end of the scheme’s three-year life, if a future Government propose to extend the scheme, the FPC will be asked to give its assessment of the impact of the scheme on financial stability and advise whether it should be continued.
The Government will make available up to £12 billion of guarantees to support the scheme during its three-year life.
Copies of the scheme rules have been placed in the Libraries of both Houses.