David Cameron has announced stage two of mortgage scheme will be launched within days, three months ahead of schedule
Help to Buy – what's that?
The scheme announced by George Osborne in March's Budget is the Treasury's attempt to encourage banks and building societies to offer mortgages to homebuyers with small deposits for properties of up to £600,000.
The first part of the scheme began in April. It allowed first-time buyers, and movers who want to purchase a newbuild house or flat, to borrow 20% of the property's value from the government. Those loans were interest free for the first three years; all borrowers needed was a 5% deposit and a 75% mortgage.
So how is phase II different?
It will see taxpayers underwrite up to 15% of a mortgage, for loans where a buyer only has a small deposit, of 5% (or more) of the property's value.
Lenders who want to offer mortgages of up to 95% loan to value (LTV) but do not want to take on all of the risk will be able to buy a guarantee from the government for up to 15% of the loan. This allows the lender to claim on the guarantee if the property is ever repossessed and sold at a loss.
This second phase was expected to launch in January 2014, but the government now says it will go live in the coming days – although it's not clear when lenders will actually start to use the scheme.
What will the guarantee guarantee?
The government will compensate the lender if the property is repossessed and it is unable to recover all its loan from its sale. The deposit would be lost first, and then the government would cover the next 15% of loss. But the lender will also have to take a 5% hit on the government's compensation, to deter it from making reckless loans.
How would that work in practice?
For example, a customer takes out a 95% mortgage on a property costing £100,000, providing a £5,000 deposit. The lender takes out a guarantee with the government for 15% of the property's value.
Subsequently, the lender repossesses the property, and only raises £65,000 by selling it. The deposit is wiped out, and the guarantee then pays out £14,250 – the 15% of the loan covered by the guarantee, less a 5% cut. The remaining £15,00 loss falls on the lender – which would have lost £30,000 without the guarantee.
How long does the guarantee last?
It will be valid for up to seven years after the mortgage is taken out.
What if the property goes into negative equity?
The guarantee will not help the buyer or lender if the property falls in value. It only kicks in if the borrower falls into difficulty with the mortgage and their home is repossessed.
How much will it cost lenders?
This is still the big question, as the price of the guarantee is fundamental to the scheme's success. If it is too expensive, there will be no point in lenders using it. If it is too cheap, it could potentially break European rules on state aid. The Treasury has said it will offer bands of prices based on the LTV of the mortgage, with higher LTVs likely to cost the most as they are the riskier deals.
Will every lender offer it?
Probably not. Industry insiders predict that some lenders will not take part in the scheme. Just three have signed up so far – Royal Bank of Scotland, NatWest, and Halifax.
How much will it cost the taxpayer?
The government has said it will put £12bn into the scheme, which is expected to run for three years. It would lose money in cases where a mortgage holder defaults, and a repossessed property is sold for less than the outstanding mortgage value, even after the mortgage holder's deposit is wiped out. But it should make a profit on loans where the guarantee is not triggered.
Who will be eligible?
Both first-time buyers and movers can apply for the scheme, but they will need to be able to afford the mortgage repayments and will need a reasonably clean credit history: anyone who has a county court judgment against them for more than £500 in the three years before they apply for a loan will be barred. It is not available to people buying second homes.
What type of properties can they buy?
The scheme is available on both new and existing homes costing up to £600,000. Lenders have their own rules about what type of properties they will lend on – for instance, some will not offer loans on homes above shops – and these criteria are likely to still be applied.
As the scheme is not available on second homes, borrowers will be asked to sign a declaration that they do not own another property anywhere in the world. It also isn't available on buy-to-let properties, and cannot be used in conjunction with the government's NewBuy scheme.
How will people apply?
It's possible that borrowers will not know that they are applying for a loan through this part of the Help-to-Buy scheme as the guarantee will be bought by the lender and the deal could happen behind the scenes – lenders might just advertise 95% loans with no mention that they are being backed by the taxpayer. The details are not yet clear.
Won't the scheme push up house prices?
The cost of a home has been rising steadily since the chancellor announced Help to Buy. Critics say he is creating a new bubble in the housing market – a charge the government strongly denies, pointing to lacklustre demand in the regions. However, Osborne appeared to bow to pressure last Friday by giving the Bank of England greater powers to prevent a damaging boom.
So who loses out?
The scheme is bad news for anyone who prudently saved more than a 5% deposit. They may now find they're competing with people with smaller savings who can use Help To Buy to target more expensive properties. Taxpayers could lose out, if many Help to Buy loans turn sour. And there could be wider pain, if British house prices do soar and then crash in a few years time.
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