Help to Buy scheme can't be used for second homes
A government mortgage guarantee scheme for homeowners will not be available for those wishing to buy second homes, own property overseas or have recent county court judgements, Chancellor George Osborne has announced.
The guarantee is to be introduced in January in the hope of helping buyers get on or move up the property ladder as the second part of the government's Help to Buy scheme. The first part of the scheme helps people buy new-build properties by offering those with 5% deposits an equity loan of up to 20% of the property's value.
The mortgage guarantee will allow lenders that want to provide home loans on new-build or second-hand homes up to the value of £600,000 – at up to 95% loan to value (LTV) – avoid the additional risk associated with such borrowing because the government will guarantee up to 15% of the loan.
Lloyds Banking Group, the biggest mortgage lender in the UK, is the first high street bank to commit to the guarantee scheme.
It is hoped Help to Buy will help more people buy homes, as the deposit they will need to find will be kept low.
However, property experts have questioned whether further stimulus is necessary when the government's Funding for Lending scheme – which has pumped cheap money to the banks to encourage them to lend more – and the equity loan component of Help to Buy already seems to have boosted the property market.
The number of mortgage approvals for home purchases rose in June, and was also 33% higher than in June 2012, according to the British Bankers' Association.
Ben Thompson, the managing director of Legal & General's mortgage club, said the government should now switch its focus to increasing the supply of new homes.
"While we can see the government fully appreciates that we need a healthy housing market and is seeking to create those conditions through a variety of stimuli, it remains completely clear that it is just as important, if not more so, to focus relentlessly on freeing up the ability for many more new homes to be built in the right areas in the UK, specifically to match pent up and future rising demand."
Others have questioned the responsibility of the guarantee. Henry Knight, managing director of mortgage broker Springtide Capital, said: "The mortgage industry has worked hard to pull itself out of recessionary conditions, therefore the question remains as to whether it is truly responsible to endorse further lending at 90-95% LTV.
"Our concern is that going too far with the highest LTV brackets could end up causing us unwanted problems further down the road."
However, Kate Faulkner, managing director of property information website Designs on Property, said one major concern is the lack of information surrounding the scheme. "The big question that still hasn't been answered about this scheme is how much will it cost lenders and will they pass this onto consumers?"
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.