27th September 2013
The controversial Help to Buy scheme guarantee scheme will run for around eight months before it is reviewed by an influential Bank of England committee.
The second and most substantial part of Help to Buy scheme will see the Government offering additional funding to help borrowers afford properties which their main mortgage loan will not cover.
Set to launch in January next year, the Government will look to provide £12bn in guarantees, which could enable up to £130bn in higher loan-to-value mortgages subject to the final scheme design. It will see the Government provide taxpayer insurance for up to 15% of a mortgage on houses worth up to £600,000 in the form of an interest free loan, allowing banks to provide up to 95% mortgages at a reduced risk, though many details are still be thrashed out.
The first part of the scheme, which allows borrowers with a deposit of 5%, called the Help to Buy Equity Loan scheme started in April.
The Financial Policy Committee at the Bank, a committee charged with identifying risks to the economy and the financial system was due to review the scheme three years after launch. But this has been brought forward to September next year. This week, the FPC asserted that the UK housing market was not overheating.
Following the review, the FPC will now be able to recommend that the £600,000 limit be reduced or that the fees charged to banks for the extra insurance are increased. Reviews will then take place every 12 months.
The scheme has been criticised because of the housing market recovery but also because of the widely divergent prices between London which has seen a 10% porice rise with a much smaller rise in the rest of the country.
It was felt it could feed into the surge of house prices but also could leave the Government with a big housing liability with the most strident critics suggesting it risked creating a British version of the Fannie Mae and Freddie Mac housing corporations in the US which suffered so badly in the sub prime crisis and are being wound up.
The Treasury statement said: “The FPC’s assessment this week – in line with that of the Chancellor and the Governor – is that recent developments in the housing market represent a broadening recovery from low levels of activity, but that we must remain vigilant as that recovery progresses.
“The Chancellor has asked the FPC to work with him every September, starting next year, 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 price cap and the fees charged to lenders – remain appropriate. At the end of the scheme’s three-year life, if a future Government proposes to extend the scheme, the FPC will have to give its agreement.”
CML director general Paul Smee says: “Lenders need a predictable operating environment to participate effectively in the Help to Buy scheme. The various pieces of information that lenders need to understand if they are to participate are steadily becoming clearer, and we anticipate that the government will publish the detailed scheme rules soon. We now have an indication of how and when the Bank of England will determine whether the scheme needs to change during its three-year proposed lifespan, and this annual review will be a key deciding factor in that. We hope that there will also soon be clarity on issues such as the government’s exit strategy at the end of the scheme.”