Wednesday, 14 March 2018

"Help to Buy 'timebomb' as five-year anniversary looms"

Emailed in by Lola a week ago, from FT Adviser:

Thousands of those who used the government's Help to Buy mortgage scheme could be hit with expensive fees on their loans, as they come to the end of their five-year interest free period in the next few months.

The equity loan scheme, which is just about to reach its five-year anniversary, allowed buyers to make use of a five-year interest-free loan from the government of up to 20 per cent of the value of a property [or 40 per cent in London] so that they could get on the housing ladder.

Now as these loans mature, customers will need to start paying rising fees on these equity loans or come up with another plan. After five years is up, borrowers must pay a fee of 1.75 per cent of the value of their loan, increasing each year by RPI plus 1 per cent, unless they can pay the loan off, usually by remortgaging.

Just for clarity, they refer to interest as "fees" for some reason. So the interest starts off at 1.75%, very low even by today's standard. If inflation next year is 3%, then next year's interest is 1.75 x 1.03 = 1.8% and so on. Even if inflation is 3% for twenty years in a row, the interest rate will only tick up to 3.2%. Given the internal logic of Help To Sell, that actually sort of makes sense. Also, it's not "Thousands of" it's "All the" but never mind.

And how bad will the "time bomb" be? Give us the gory details!

Think tank the Resolution Foundation said the loans were “a ticking time bomb”.

The group calculated those who used Help to Buy back in 2013 will pay an average of £652 this year on their loan if they live outside London or £927 if they live in the capital.

That's not going to kill anybody, is it? And what's the alternative for our hard-pressed home buyers?

... there are some signs of movement, with Ipswich Building Society introducing a new ex-Help to Buy remortgage offering late last month.

The society said that all of its products will be available to Help to Buy applicants, at up to 95 per cent LTV, and its standard mortgage assessment and affordability calculation, through its manual underwriting process, will apply.

“We are pleased that we can help borrowers moving away from a Help to Buy mortgage and through our expert manual underwriting we’ll continue to specialise in real mortgages for real people, who have unusual or complex occupations and find themselves categorised as ‘mortgage misfits’, otherwise ignored by other high-street lenders,” Richard Norrington, CEO, Ipswich Building Society, said.

I know that this was the government's plan all along, pump up house prices and then panic people into remortgaging, which is all gravy for banks and building societies (as long as house prices keep ticking up) but which bank or building society would be daft enough to offer 95% mortgages for 1.75% or less?

If and when house prices fall a bit, the government will no doubt introduce "Help To Remortgage Your Help To Buy Loan" and so on and so forth.


ThomasBHall said...

Is it a fee because they retain the "equity"?

TheFatBigot said...

Perhaps I have misunderstood it, or the scheme was not recited accurately in the quote you gave. In my world a rate of "1.75% ... increasing each year by RPI plus 1%" means that in the fifth year the rate is 1.75% and in years six it is 1.75% plus RPI plus 1%, so with RPI at 3% the total rate would be 5.75%.

This is how Money Supermarket describes it:
"The government's 20% slice of the loan is interest-free for the first five years. In year six, borrowers will be charged a fee of 1.75% of the equity loan amount.

Each year after year six, the fee will be 1.75% plus inflation as measured by the Retail Prices Index plus 1%."

Your calculation follows the illustration given in the government's guidance and seems far more realistic.

It's only mid-March and I#m agreeing with you already Mr Wadsworth, this might be a bad year

Mark Wadsworth said...

TBH, your guess is as good as mine.

TFB, the wording on the interest rate is fantastically unclear and could mean several things. So I checked the guidance leaflet and their example makes sense at least.

Lola said...

It's all 'Help to Sell' anyway. I was trying to point this out in the comments on the article, but...well YOU know...

Mark Wadsworth said...

L, agreed.