RAY BOULGER: Another no change month
“There was little reason to expect any change from the MPC this month but if Mervyn King voted for an extra £25bn QE for the third successive month perhaps his best chance of persuading a majority of the committee to back him before his term of office ends in June will be next month, as the MPC will have a draft copy of the next quarterly inflation report to help its deliberations.
“The big news on the property and mortgage front since the last MPC meeting was the Help to Buy initiative announced in the Budget. The 20% shared equity scheme, available only on new build properties, is simply an enhancement of the previous First Buy scheme and thus will have required relatively little extra work by the Government.
“The Government has allocated £3.5bn to this part of the Help to Buy scheme over the next three years. Its key points as far as purchasers are concerned are:
• it still only requires a 5% deposit but is no longer limited to first time buyers – always an odd restriction bearing in mind its main objective is to stimulate the construction of more new homes.
• the maximum purchase price has been increased to £600,000.
• there is no longer a maximum income limit for purchasers.
“However, one other important change is that the Government is now providing the whole of the 20% equity share, whereas with FirstBuy this was provided on a 50/50 basis by the Government and the developer. The current value on a mark to market basis of these developer equity loans is below 50%, but if the market believes the Government’s action to boost the housing market will be successful the price should start to improve.
“From a developer’s perspective, for customers seeking a 95% LTV mortgage, NewBuy was seen as a more attractive option than FirstBuy, simply because it required them to make a smaller contribution. With Help to Buy this all changes. Persuading a customer with a 5% deposit to use this new shared equity scheme will cost the developer nothing, whereas if that same customer uses a NewBuy mortgage it will cost the developer a little over 4% (a 3.5% insurance premium plus an admin fee).
“Thus anyone visiting a developer’s sales office today with only a 5% deposit is likely to get very different “advice” as to which mortgage is best for them compared to the “advice” they would have received before the budget. Mortgage advice based on which mortgage is best for the vendor of a property may not have been what the FSA had in mind in its Mortgage Market Review by insisting that most mortgage customers obtain advice before choosing a mortgage.
“Buyers of a new build property who use a Help to Buy shared equity scheme should bear in mind that as the developer is no longer subsidising the mortgage they will now be in just as strong a negotiating position as if they are using any other mortgage and therefore should be much better placed to negotiate a discount off the list price and/or some other benefit.
“From a lender perspective this brings shared equity much more into the mainstream, with a much larger and more diversified target market. The £3.5bn made available by the Government will support an extra £13.125m of first charge lending over the next three years, enough to make it worthwhile for even the largest lenders to support it, especially as it involves low risk lending with a maximum LTV of 75%.
What Should Borrowers Do?
“The cost of fixed rate mortgages has continued to decline over the last month, especially 5 year fixed rates, which now start at 2.59%. One consequence of the Cypriot reminder that the Eurozone crisis is not going away any time soon was a sharp drop in UK gilt yields as the UK is still seen as one the few jurisdictions where international investors can safely place their funds.
“It is an ill wind and although the Eurozone crisis is inhibiting economic activity in the UK it is also boosting mortgage borrowers by helping to keep interest rates low. With fixed rate mortgages generally cheaper than trackers or discounts, and 5 year fixes available below 3% on LTVs up to 75%, many people will welcome the opportunity to fix their mortgage payments for as long as 5 years at current low rates.”