Property Wire: New Help to Buy scheme for London will make renting more costly
Mon 30 Nov 2015
Monthly costs for purchasers of a new build property using the new London Help To Buy scheme will besignificantly less than rental costs of a comparable property, it has emerged.
The Chancellor of the Exchequer George Osborn announced that from early the government will increase theupper limit for the equity loan it gives new buyers within Greater London from 20% to 40%.
It means that Londoners with just a 5% deposit will be able to get an interest-free loan worth up to 40% of thevalue of a newly built home. People then need to get a mortgage of up to 55% to cover the rest.
On top of this the current restrictions on who can buy a home through shared ownership will be removed fromApril 2016. Shared ownership allows people to buy a share of a home rather than the whole house and then buy agreater share over time as they can afford to. They pay rent on the rest of the property.
Currently, these are allocated in several different ways including criteria set by local councils, for examplewhether potential buyers work in the local area or if they are already in council housing.
Help to Buy Shared Ownership will lift the limits so that anyone who has a household income of less than 80,000outside London, and 90,000 inside London, can buy a home through shared ownership. Only military personnelwill be given be priority over other groups. The scheme will apply across England.
People can buy a share between 25% and 75% of a home. The rent on the rest of the property wont be morethan 3% of the amount left. For example, on a house worth 227,000 where the buyer has bought a 40% share,the rent wont be more than 3% of the remaining 60% - in this case 4,000 a year, or 340 a month.
Help to Buy Equity Loans are already open to both first time buyers and home movers on new build homes inEngland with a purchase price up to 600,000. Currently, if youre able to pay at least 5% the value of your homeas a deposit, the government will lend you up to 20% of the rest of the value of the property, alongside yourmortgage of up to 75%.
Equity Loan will be now available until 2021 and, to reflect the current property market in London, from early2016 the government will increase the upper limit for the equity loan it gives new buyers within Greater Londonfrom 20% to 40%.
Ray Boulger, senior technical manager at John Charcol, explained that monthly costs for buyers of a new buildproperty using the new London Help To Buy scheme will be significantly less than rental costs of a comparableproperty, massively incentivising Londoners to find the 5% deposit and other costs.
He also pointed out that the London HTB scheme will also result in much lower monthly costs for a comparableproperty than using the Starter Home scheme, unless the HTB Equity Share scheme is made available topurchasers of Starter Homes Initiative properties.
The first charge mortgage for purchasers will be below the 60% maximum LTV to qualify for most lenders bestrates and so borrowers in London will be able to access even cheaper rates than on the current HTB scheme.
Over five years a buyer using the HTB Equity Share scheme would save 56,460 in monthly payments but abuyer using the Starter Homes Initiative would benefit by recouping the initial 100,000 discount.
Many buyers who will not be able to obtain a mortgage of 380,000 will qualify for a mortgage of 275,000 andthis, plus the much lower monthly payments, will result in the Starter Homes Initiative flopping in London unlessthe Government allows buyers to combine it with at least the original Help to Buy scheme, he said.
Peter Rollings, chief executive officer of Marsh & Parsons, pointed out that currently the London housing marketis a law unto itself. It is encouraging to see the Government recognise the added affordability pressures at workin the capital, and tackle these with a designated London Help to Buy scheme, he said.
With rumours that interest rates might rise earlier than expected, this will inject renewed confidence and shouldhelp thousands of prospective homeowners realise their aspirations of getting on the property ladder, heexplained.
But the Government needs to be careful not to put all its eggs in the first time buyer basket. Its narrow focus onfrontloading people onto the property ladder, is causing a lot of drag in the rest of the market, and doing nothingto buoy up sinking supply. Last years Stamp Duty changes have marooned the top end of the property marketand Osborne has missed a trick by not acknowledging this, he added.
However, Patrick Bamford, director of mortgage insurance Europe for Genworth, believes that the new Help toBuy initiatives still leave questions hanging over the future of the mortgage guarantee, which has been one of itssuccess stories so far.
The Government clearly has no shortage of ideas to support first time buyers, and the London Help to Buyscheme will help to tackle some of the challenges faced by hopeful owners in the capital. To have the biggestimpact on overall home ownership, these additions must run alongside the continued use of a mortgageguarantee or private mortgage insurance to boost access to high LTV mortgages across the entire market beyond2016, he said.
New data shows that the first time buyer numbers picking up again, but it would be remiss to assume that thissegment of the market is back to full health. High LTV lending has been an essential tool to support homeownership in the past and Government must take steps to ensure this continues in future, he added.